STRESS FREE INVESTING

NOI – Net Operating Income is derived by subtracting the projected annual expenses from the forecasted annual rents.  The process is easy if you follow these steps:

Step One – Determine Forecasted Annual Rents:  Annual rents are derived by doing a Comparable Market Analysis of the rents in the surrounding area where the subject property is located.  These figures can be obtained through a Realtor’s MLS or by doing an internet search, using sites like Zillow, Realtor.com, hotpads.com, etc.  Compare dollars per square foot, age, amenities and other factors that will affect maximum rent.  The average rental property is vacant one month a year, so you should deduct one month’s rent as a vacancy factor.  Your rental income forecast might look something like this:

Scheduled Gross Rent ($1,200 per month)                             $14,400

            Less vacancy                                                                -  1,200

Forecasted Annual Rents                                                         $13,200

Step Two - Forecasting Expenses:  Annual expenses should be realistic and forecasted for at least three years to get a realistic NOI.  The basic expenses include:

Real Estate Taxes – these could change for a couple reasons.  If the current owner gets homestead exemption, a year from now you’ll have an increase in tax expense when the homestead exemption is removed.  You may receive another break in taxes is when purchasing new properties; the property is often taxed as land only and does not include the building until the following year.

Insurance is often substantially lower than traditional homeowner’s insurance, usually 30% -40% lower.  If you purchase a new townhome, your annual policy in Florida will run between $400 - $600 a year.

Home Owner’s Association (HOA) dues can be a big expense.  You need to find out what is included: cable, water, swimming pool, fitness center, gated entrance, etc.  This can often give you an edge over competing rental properties.  Also, check for any up-coming assessments.

Maintenance can be substantial on older properties.  With new properties that are under warranty, there is virtually no maintenance expense for the first couple years.   A lot of investors cover their biggest potential expense by purchasing home warranties for about $400 a year.  I recommend your rental agreement assign the first $100 of any maintenance expense to be covered by the tenant.

Management is an expense, if you are using a property management firm.  If you choose to use a tenant acquisition company like SunState, you can limit this expense to one month’s rent every two to three years.

Mortgage expenses are not included in this analysis because they reflect return on investment and Cash On Cash analysis.

Your Expense Forecast could look something like this example:

Expenses:

            Real Estate Taxes                                                            $1,600

            Insurance                                                                            400

            HOA (150 per month)                                                       1,800

            Maintenance                                                                        200

            Management (1/2 of one month’s rent)                              600           

Total Property Expenses                                                             $4,600           

Net Operating Income (NOI):

            Income                                                                            $13,200

            Expenses                                                                         -   4,600

NOI                                                                                               $ 8,600

Percentage ($8,600 (NOI)/$120,000 Purchase Price)              7.2%

STRESS FREE INVESTING IS POSSIBLE

The ideal investment is where you have perfect tenants that suddenly appear when your previous tenant moves out, you have no maintenance problems or expenses and no management hassles or expenses.  Does that type of investment exist, probably not; however, SunState Home Investment Realty offers a program that is very close to that description.

SunState has introduced a guaranteed investment program that encompasses all of the above.  There are some secrets that make this all possible.  I will discuss them over the next few blogs and will be happy to answer any questions you may have.

TODAYS TIP: Don't confuse Net Operating Income (NOI) with Return On Investment (ROI).  NOI deals with the adjusted gross income, less the operating expenses.  The net is compared to the value of the property.  ROI compares the investor's actual cash invested and the return as it compares to that cash investment.  The ROI is more realistic as compared to other investments and will yield a much higher percentage of return than the NOI.