If you’re not into baseball, you might not get it if I said this hitter was rung up last time. That means he struck out looking, and the umpire “rung him up” — calling strike three. If a hitter has a couple “ducks on the pond” it merely means there are two runners in scoring position. When a pitcher is said to be “dealin’ ” it means he’s really on that day — all his pitches are “nasty”.
As I said yesterday, two baseball guys shootin’ the breeze could include something like, “Yeah, he was bringin’ it today, but when he brought in Uncle Charlie for a visit, that was the end of that!” I leave it to baseball folks to translate for the ‘sports challenged’ reader. 
Here are a few more definitions for ya — all in plain English.
Gross Scheduled Income — GSI — Sometimes called Potential Income, and a few other bastardizations. Simply put, it means what the property will produce in rent for a year. (always annual, ok?) If it’s projected it should clearly say so when sweatin’ over the analysis.
Note: Including something like ‘Other Income’ just below GSI. This would include stuff like income from a laundry room.
Vacancy Rate — No doubt self explanatory, but it should still be explained. It’s the percentage of vacancies any particular property experiences — express in terms of dollar$. It’s expressed in dollars in the actual analysis, but only after the percentage is clearly stated. Don’t play with this figure, as it will come back to bite you in the butt, and probably sooner rather than later. Take the attitude that, ‘it is what it is’ and move on. Also, many pros, including this one, put the actual vacancy rate used in the ‘assumptions’ portion of the analysis. Playin’ hide ‘n go seek with numbers ain’t nice.
Gross Operating Income — GOI This is what we get when subtracting the income losses from vacancies from the GSI. Pretty straightforward.
Operating Expenses This includes taxes, insurance, any utilities paid by the investor, management, repairs & maintenance, and the list goes on. This particular number may be the biggest lie on a property’s income & expense statement. We do our own — period, no exceptions, go fish. It’s not that we don’t trust the seller — but we do our own, thank you. (The whole, ‘boots on the ground’ thing ya know.)
Net Operating Income — NOI Simply take your GSI (plus any other income) minus your Vacancy Rate (in dollars) minus all your Operating Expenses and you arrive at your NOI. Please, avoid the mistake rank amateurs make all too often. They think NOI comes after taking away your financing, (or debt service or your monthly payments, however you wanna say it.) Doing that will take you to East Toilet Seat, Rhode Island when you just wanted to get a few things at the store down the street.
Annual Debt Service It’s 12 months of loan payments — not including taxes and insurance. Rookies will sometimes make that mistake which means they’ve taken taxes and insurance out twice. (in Operating Expenses) Very uncool. The ref will surely throw a flag on that move. Again — this comes after you’ve arrived at your NOI. Taking Annual Debt Service out in order to arrive at NOI will screw your numbers up like Hogan’s goat. (Don’t ask — Dad used to say it constantly, so I just figured it was something he heard from Moses when he was a kid. I’m guessing maybe goats screw up a lot?) It’s a beginner’s mistake, so take care.
Cash Flow Before Taxes This is one of the cool numbers you’ve been lookin’ for. Just take your newly found NOI and subtract the Annual Debt Service. That number is your Cash Flow Before Taxes. If this number turns out to be negative, throw the analysis in the trash and move on to another property. (Just saved you all kinds a heartache with that one.)
I’m not gettin’ into Cash Flow After Taxes. Why? It’s not for the beginner’s class. I will say this however. There are times when you might have a very slight negative cash flow which will magically turn into a very nice round positive number when your tax savings are added into the equation. Tax savings? Oh, that. It’s what comes after Tax Shelter is applied to a real estate investor’s tax return. A whole ‘nuther post altogether.
The idea is to avoid negative cash flow properties, ‘cuz I recommend against negative cash flow with incredibly rare exceptions.
Just understand that your tax savings can and often will make a measurably significant difference in your after tax return. And your after tax return is the only return that matters. The rest is merely arithmetic — doing numbers without a final conclusion — Conclusion = Cash Flow After Taxes.
That will lead to Internal Rate of Return. Forget I said that. Also, ‘nuther post.
Meanwhile, back a BawldGuy Ranch, I’m Jonesin’ here for a fix. Call me already. 619 889-7100. Have a good one.
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