The Real Estate Income Statement

The value of any investment is simply the present value of its expected cash flows, using a discount rate that reflects the riskiness of the cash flows. However, there are several ways of estimating the PV of a real estate project.

The most general way of valuing a project is to capitalize the Net Operating Income (NOI) of the investment.

Value = NOI / Capitalization Rate

This works well as a general valuation tool because it uses information that is reasonably similar for all investors.

Cap Rate

What is a cap rate?

How do you calculate a cap rate?

How does risk affect your cap rate?

What is the downside of valuing projects using only NOI and a cap rate?

Simplistic Operating Statement

PGI Potential Gross Income

-V&BD Vacancy and Bad Debt

+ MI Miscellaneous Income

EGI Effective Gross Income

- OE Operating Expenses

=NOI Net Operating Income

Assuming competent management, these numbers should be similar for all investors.

The Bottom Half (Investor Specific)

NOI

-DS Debt Service

=BTCF Before-Tax Cash Flow

-Taxes

=ATCF After-Tax Cash Flow

Where do we get the tax amount?

Taxes (Operations)

NOI

-Depreciation

-Amortized Financing Cost

-Interest

=Taxable Income

X Marginal Tax Rate

= Tax Liability

After-Tax Equity Reversion

Selling Price

-Selling Expenses

=Net Selling Price

-Loan Balance

=Before-Tax Equity Reversion

-Taxes Due on Sale

=After-Tax Equity Reversion

Taxes Due on Sale

Net Selling Price

-Book Value

-Unamortized Financing Cost

=Taxable Gain

X Tax Rate

=Taxes Due on Sale