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Step One: Computing Your Net Operating Income

When you launch the Real Estate Offer Generator, the first screen that appears is the Net Operating Income Calculator (Under the Net Operating Income tab). Before you can determine how much you can pay for a property, you must first determine how much the property will cost you each month you own it. This number is referred to as the Basic Net Operating Income (NOI). The first step in computing the NOI is to enter the monthly rent you believe the property will generate (the Rent field). The remaining steps deduct expenses associated with your property. These expenses include the following:

bulletVacancy Reserve
bulletMaintenance Reserve
bulletManagement Fee
bulletOther expenses (Such as property association fees)

All numbers are entered as monthly amounts. If the deduction does not apply to your property you may leave it blank (the system will assume that the deduction is 0). To derive values for Vacancy Reserve, Taxes, Maintenance Reserve, Management Fee, and Others you may click on the blue highlighted label and enter the value as a percentage of the monthly rent (See Figure 1). If you change the monthly rent, the values for these fields do not automatically get recalculated. You must re-enter the percentage again. You can, of course, just enter the values directly. Each time you change the value of a field the basic NOI value gets recalculated.

Figure 1: Percentage Calculator


Once you have completed entering the monthly rent and monthly expenses, you have your basic NOI value. The basic NOI value is the most you can pay per month in financing costs to break even on your property. Of course as an investor you want to do better than just break even. That is where the Adjusted Net Operating Income value comes into play. The Adjusted NOI value is based on a desired return on equity for all cash that is used to purchase the property. Just as if you were putting money in the bank and expecting an interest payment, putting money into real estate should yield a similar result. There are two possible initial cash layouts associated with purchasing an investment property. These are your initial deposit (Deposit Amount field) and the estimated repair value (Repair Amount field) in order to make the property rentable. For each cash layout, you expect a certain return on that money. The returns are entered as a percent (such as 5 for a 5% return). The percentage of return on your down payment and repairs reduces the NOI value. If you can finance the property for no more than the Adjusted NOI value you will make your desired return on investment your first year of doing business!

Figure 2 contains an example of computing the NOI for the property.

Figure 2: Net Operating Income Screen

After the NOI is computed, you may print an NOI report for a hard-copy reference. See Figure 3 for an example of an NOI report.

Figure 3: Net Operating Income Report Preview


Step 2: Computing Your Offers


Step 3: Generating Your Offer Letter


The Cash Flow Tab

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