Real Estate Matters | Annual Property Operating Data

Juliet Risdon

When you invest in property, you expect to collect money, mostly in the form of rent, and spend money to pay for the operating expenses and the loans against the property in the form of mortgage. Ultimately you are aiming for positive cash flow, and to keep as much money in our pockets while minimizing tax expenditure in a legal way. Perhaps someday you can also sell the property at a handsome profit. In other words, you’re looking for cash flow, appreciation, amortization and tax shelter – the four basic ways to make Money that we’ve already spoken about.

Today we will take a look at a basic income-and-expense statement for real estate, commonly called the Annual Property Operating Data (APOD).

Some Basic

Definitions:

Gross scheduled income: The total annual rent value. If the unit is vacant, the potential annual rent value.

Vacancy allowance: Usually expressed as a percentage of the gross scheduled income. It is an estimate of the amount of potential income that will be lost due to vacancy. This is almost always an estimate. Usually vacancy rates are relatively low in Macau.

Gross operating income (GOI): The gross scheduled income less the vacancy allowance. In short, it’s the money that you actually collect.

Operating expenses: items such as property insurance and taxes, repairs, and management fees if any. Includes any costs that are necessary to keep the revenue stream flowing. Mortgage payments, depreciation and capital improvements not included.

Net operating income (NOI): Gross operating income less the operating expenses. It’s what’s left of your total potential income after all vacancy and expense items are subtracted.

Let’s take these definitions and see how they might fit into an actual property analysis. Say that you are looking at a two- bedroom apartment at One Oasis renting for HKD 14,000/month and the owner is telling you that the operating expenses came to about HKD 15,000 last year. Estimating a 2 percent vacancy allowance, you’ll come to:

Gross scheduled income:             168,000

Less vacancy allowance (2%):      3360

Gross Operating Income:             164,640

Less operating expenses:             15,000

Net Operating Income:                 149,640

The NOI is what you would take home if there is 0 percent debt in the property. But usually depending on your mortgage rate and structure you may or may not have cash leftover in the end. But as mentioned in the last article, most investors are not looking for positive cash flow in Macau unless they are veterans and got started a very long time ago. In the next article we will discuss the ‘time-value of money’ and how that will affect your real estate investment decisions.

Juliet Risdon is a Director of JML Property and a property investor.

Having been established in 1994, JML Property offers investment property & homes. It specializes in managing properties for owners and investors, and providing attractive and comfortable homes for tenants.

www.JMLProperty.com

[email protected]