![]() ![]() That's going to change the free cash flow after debt service which is not what we want to do. Still another may choose to leverage the property at 75% at a different mortgage rate. Another owner may choose to leverage the property up to 50% at one mortgage rate. One owner may choose to acquire property all for cash. That's going to vary from owner to owner. The owner of the property decides what sort of debt they're going to place on the property. Debt service is not included in an operating expense because an operating expense has to do with the property itself - what is the property expending or spending to make sure the business runs smoothly. When we're talking about free cash flow, we're talking about debt service included. If you have a loan on the property, debt service is not included in the NOI. ![]() They include debt service like mortgage payments. There is a big mistake a lot of people make when calculating the NOI. So the NOI is really just telling us what the gross income is but subtracting the normal operating expenses. That’s the leftover money - the free cash flow of the property. That means the NOI of the property - the gross income - all the income we have coming in - minus all the operating expenses - is $500,000. Let's say we have a property with a gross income of $1 million. But an operating expense is incurred in the normal course of doing business - repairs, maintenance costs, utilities, staffing, that sort of thing. That would be a capex or capital expenditure. We're increasing the value of that property so that would not fall under an operating expense. For example, let's say we are renovating the kitchen in a unit. So basically, any expense that the property incurs over the course of doing normal business.Ĭapital Expenses Are Not Operating ExpensesĪ capital expense is an improvement to the property.
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