The following analysis is used to evaluate potential investment properties for NowlinRE’s clients.  (And for my own investment properties)  It’s also the analysis that banks will use when deciding to loan money on a particular property for a client.  It is extremely beneficial information for investors! 

Total Rent = Potential Gross Income (PGI)

-          vacancy and collection loss = Effective Gross Income (EGI)

-          taxes, insurance, management, maintenance = Net Operating Income (NOI)

(PGI – 30% = NOI for banks figures) 

NOI – debt service (Principal and Interest) = True Cash Flow

NOI / debt service = Debt Coverage Ratio (DCR) Bankers prefer 1.2 or better.

1.0  is break even point. 

NOI / Obtainment Price = CAP Rate

Obtainment Price / Rent = Gross Rent Multiplier

Operating Expenses / Sq. Ft. = Operating Efficiency Ratio (smaller the better)

Cash Flow / Cash Invested = Return

NOI / CAP Rate = Value

This formula is a great base to begin with however, keep in mind that every property has different potentials and some may not fit into this box.  So be flexible if need be.  For example, if you know rents can be raised, or there is room to expand, these factors can’t fit into any box.  Every possible angle should be considered before writing an offer.