1.The estimated effective gross income (EGI) for the first year of operations can be calculated as follows: Potential gross income: $340,000 Vacancy and collection losses: 15% of potential gross income = $51,000 EGI = Potential gross income – Vacancy and collection losses = $340,000 – $51,000 = $289,000
- The estimated net operating income (NOI) for the first year of operations can be calculated as follows: EGI: $289,000 Operating expenses: 40% of EGI = $115,600 NOI = EGI – Operating expenses = $289,000 – $115,600 = $173,400
- For the first year, you can estimate the going-in caprate (Ro) using NOI. The NOI is $173,000. Your total purchase price (Ro = NOI) = $173,000. Or, $173,000.
This cap rate is the initial return on investment, it’s a ratio of net operating income to purchase price. This gives the buyer an indication of the initial return.