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Given
the extraordinary rates of appreciation over the
last several years there are now thousands of
people investing in real estate. But this does
not mean that every deal out there is going to
be a winner.
As an investor you must take stock as to what
your investment objectives really are. Given the
amount of resources you have (both in terms of
time and money), how long you plan on holding,
and what kind of return you expect, this will
determine what kind of property you will be going
after and how much you will be willing to pay.
At the very least you should be familiar with
the following terms and how they are calculated.
Potential
Gross Income PGI - (This is
the maximum amount that the property will produce
in one year.)
Vacancy & Collections
V/C - Factor used to adjust PGI since
very rarely does a property bring in the full
Potential Gross income. (5-20%)
Effective
Gross Income EGI - By subtracting
V/C from PGI you will arrive at the effective
gross income. (EGI) This is the amount that you
can realistically expect to bring in for this
particular property.
Operating
Expenses OE – Operating expenses
are any expenses incurred by the owner in operating
the property. (i.e. lawn maintenance, taxes, etc.)
Net Operating Income
NOI – This is often used the most frequently
used metric to value an investment property by.
This is derived by subtracting Operating Expenses
from Effective Gross Income. |
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