Recent Articles
Nir has written extensively on purchasing, operating, and selling apartment buildings. To get the complete list, contact Nir. His most recent articles include:
How to Sell High and Minimize Taxes?
- Depreciation – Use it or Lose it!
- When should I Consider a Reverse Exchange?
- How can Landlords be Employers by California Law?
- How to invest your IRA money in apartment buildings?
Key Terms
The following is a partial list of explanation of key terms related to apartment buildings.
Cap Rate
The Capitalization Rate or Cap Rate is a ratio used to estimate the value of income producing properties. Put simply, the cap rate is the net operating income divided by the sales price or value of a property expressed as a percentage. Investors, lenders and appraisers use the cap rate to estimate the purchase price of apartment buildings.
Capital Gains Tax
Not all income is born equal. There are different types of taxes. Unless you are a trader, gains on apartment buildings are considered Capital Gains and are taxed at rates depending on your holding term. Most people forget to factor in the state capital gain taxes and the federal depreciation recapture.
Cash on Cash Return
Cash on Cash Return is a percentage that measures the return on cash invested in an income producing property. It is calculated by dividing before-tax cash flow by the amount of cash invested (down payment amount) and is expressed as a percentage. If before-tax cash flow for an investment property is equal to $15,000 and our cash invested in the property is $100,000, cash on cash return is equal to 15%.
Debt Coverage Ratio
Also known as Debt Service Coverage Ratio (DSCR). The debt coverage ratio (DCR) is a widely used benchmark which measures an income producing property's ability to cover the monthly mortgage payments. The DCR is calculated by dividing the net operating income (NOI) by a property's annual debt service. Annual debt service equals the annual total of all interest and principal paid for all loans on a property. A debt coverage ratio of less than 1 indicates that the income generated by a property is insufficient to cover the mortgage payments and operating expenses. For example, a DCR of .9 indicates a negative income. There is only enough income available after paying operating expenses to pay 90% of the annual mortgage payments or debt service. A property with a DCR of 1.25 generates 1.25 times as much annual income as the annual debt service on the property. In this example, the property creates 25%more income (NOI) than is required to cover the annual debt service.
Deducting Rental Losses
Deducting losses produced by your apartment building depends on your occupation and your level of activity in the day-to-day management. Contact Nir Yacoby for general guidelines, or your tax adviser for more detailed analysis.
Depreciation
Depreciation is an accounting device that does not have anything to do with the physical condition of your property. Apartment buildings are depreciated over a 27.5 year period. See the recent articles section on depreciation.
Gross Rent Multiplier (GRM)
The Gross Rent Multiplier is used as one benchmark to evaluate the value of apartment buildings. It is equal to the Sales Price of a property divided by the rental income. For example, if the sales price of the property is $1,000,000 and the gross rents are $125,000 then the GRM is 8.0
Internal Rate of Return (IRR)
The Internal Rate of Return is another valuation benchmark. It measures the average annual yield on an investment. For an apartment building, the internal rate of return or IRR calculation uses the initial amount invested in the property, a series of projected cash flows which are usually after-taxes, and a projected After-Tax Sales Proceeds amount.
Loan-to-Value Ratio (LTV)
The LTV ratio equals to the loan on the property divided by its value. For example, if the value of apartment building is $1,000,000, and the loan on it is $650,000, then the LTV is 65%.
Net Operating Income
Net Operating Income or NOI is equal to a property's yearly gross income less operating expenses. Gross income includes all income associated with a property. Operating expenses include repairs and maintenance, insurance, management fees, utilities, supplies, property taxes, etc.
Rent Control
A socialist device to distribute wealth thought of by some liberals executed by bureaucrats at the city level. Each year the body of knowledge associated with rent control law expands because both the inventors and the executioners need something novel to come up with – how else can they justify their salary or social status?
