Investment Analysis

Real Estate Investment Analysis ## Overview California real estate brokers who serve investor clients must be fluent in the financial metrics used to evaluate income-producing properties. These metrics allow investors to compare opportunities, evaluate returns relative to risk, and assess how leverage affects performance. This section covers the core investment analysis tools tested on the California broker exam. --- ## Net Operating Income (NOI) NOI is the foundation of commercial real estate valuation and analysis. It measures the property's income-generating ability before debt service. Formula: `` NOI = Gross Scheduled Income (GSI) - Vacancy and Credit Loss = Effective Gross Income (EGI) - Operating Expenses = NOI ` Gross Scheduled Income (GSI): Total rent if all units were occupied at market rate for a full year. Vacancy and Credit Loss: Typically 5–10% for stabilized properties; higher for value-add or distressed assets. Effective Gross Income (EGI): GSI minus vacancy = actual expected income. Operating Expenses include: Property taxes, insurance, utilities (landlord-paid), property management fees, maintenance and repairs, landscaping, reserves. Operating expenses do NOT include: mortgage payments (debt service), depreciation (non-cash), capital improvements, or income taxes. Example: - GSI: $120,000 (10 units × $1,000/month × 12) - Vacancy 5%: −$6,000 - EGI: $114,000 - Operating expenses: −$48,000 - NOI: $66,000 --- ## Capitalization Rate (Cap Rate) The cap rate is the most widely used measure of value for income properties. It expresses the relationship between NOI and property value. Formula: ` Cap Rate = NOI ÷ Value Value = NOI ÷ Cap Rate NOI = Value × Cap Rate `` Interpretation: - A lower cap rate = lower risk, lower return (premium price) - A higher cap rate = higher risk,…