The following financial measures will help you to evaluate an investment.
Net Operating Income (NOI):
Cash flow after expenses NOT including debt service or taxes.
Net Present Value (NPV):
The sum of the present values of the annual cash flows, using a time-value-of-money calculation, minus the initial investment. And investment with a NPV of zero or less will lose money over time.
Capitalization (Cap) Rate:
Rate of return used to determine the value of a property's income stream. It is calculated by dividing the cash flow by the cost or value. The higher the cap rate the lower the value of the property. The formula is as follows: NOI divided by purchase price = cap rate
Cash on Cash Return:
Before tax cash flow (NOI less debt service) divided by initial cash outlay: also referred to as equity dividend return.
Gross Rent Multiplier (GRM):
Total rental income assuming the property is 100% leased. It is calculated by dividing the GRM into the sales price. The higher the gross rent multiplier, the lower the value of the property.
Cash Flow Before Tax (CFBT):
This is achieved by NOI divided by ADS (Annual Debt Service).
Note: Many investors in the Vancouver market hold and rent for passive appreciation.
- Make sure you know what the insurance deductibles are for the strata
- Insurance should cover all deductibles, including but not limited to, water damage.
General for all residential investment purposes:
- Loss of rental coverage for a major loss is highly recommended
- Personal content insurance i.e. appliances, improvements etc.
- 3rd party liability coverage.
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