Real Estate Financial Analysis Definitions

Gross Scheduled Income (GSI):  This is the total income based on current rents 

Gross Adjusted Income (GAI) :    Arrived at by subtracting a vacancy factor from GSI  Usually 5-8%.

Expenses:  These include taxes, utilities, insurance, repair allowances, management fees, landscape and other maintenance.  They are shown typically as a total with supplemental documents used to breakdown expenses and perform financial analysis.  Purchases should verify expense categories to determine if they seem reasonable.  Your Realtor can help.  Also self managed properties can reduce certain expenses to improve the bottom line

Net Operating Income (NOI):   Subtract expenses from the Gross adjusted income.

Cap Rate:   Net Operating Income / Selling price.  The higher the better.  Properties in great condition in desirable areas have lower cap rates than properties that need repair, or are in less desirable locations.

How to analyze a property:

Quick analysis:  The Net Operating income less the debt service is your cash flow.   Multiply your monthly Principal and interest * 12 and subtract from NOI to determine your annual positive cash flow.

Detailed analysis:  Review expenses.  Determine if they appear to be reasonable.  If you intend to self manage then you may be able to reduce certain expenses.  Determine what you anticipate the NOI to be after ownership and compare to your debt coverage.  You also want to make certain that rents are in-line with market and not simply a result of recent increases to help sell the property.   A qualified Realtor can help guide you through the process.

Payment Requirements:

Small multi-family properties of 4 units or less use residential lending.  If one of the units is to be occupied by the owner, the interest rate is similar to a single family owner occupied home.  If the property will not be owner occupied, it is considered an investment property and interest rates will be higher (typically ½%). The income of the purchaser as well as the income from the property is used to qualify the purchaser for the loan.

Properties of 5 units and up are considered commercial and subject to much more stringent lending requirements. Interest rates are typically higher than for residential purchases and loan terms are shorter.  A commercial lender will analyze the property to determine the maximum amount that they will loan on the property. Most often they will add expenses to those reported by the seller.  Management fees and repair allowances are often not included in property marketing materials but are factored into the lender's numbers to compute NOI.  For commercial properties NOI needs to be around 1.2 * debt coverage.  The difference between the maximum loan amount that a lender is willing to make and the selling price is the down payment requirement.  Most often commercial properties require very large down payments to make the deal work. As part of the financial Analysis on Commercial Properties in Seattle, I always present the findings to one or more commercial lenders to determine the financing requirements.  This allows me to pre-qualify potential buyers prior to  entering into a contract.