Before investing in real estate, do your homework first! Investors take note: Each time you want to invest in property, there are metrics you need to consider. One of them is called the Net Operating Income (NOI). Do you know how to calculate this profitability formula? According to “Crushing It in Apartments and Commercial Real Estate”, author Brian Murray made it easy! Just take the income the property will generate for you in a year – all the way from rental income to parking fees and laundry machines. Take this amount and deduct annual operating costs– such as property taxes, maintenance, and insurance. You will be left with a figure, and this difference is called the Net Operating Income! This number, along with the property’s Cash-On-Cash Returns, is essential.
In a nutshell, NOI = Gross Income - Operating Expenses.
Now that you've learned about a property's Net Operating Income (NOI), it's time to know more about the property's Cash-On-Cash Returns (CCR). This figure can be calculated by taking the NOI and dividing it by the amount you've invested in the property in advance. Next, convert this to percentage form by multiplying this number by one hundred and adding a percentage sign after it! That percentage is the property's CCR, and the higher it is, the better the performance.
In a nutshell, CCR = NOI / Total cash invested x 100%.
Investing in properties with significant CCRs is your best bet since you can reduce your inherent investment risk.
The author also recommends retaining your property for the longest period of time possible- even against the temptation to cash out when the property brings in revenue. This way, you can create true long-term value.
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