CHAPTER 15 – Measurements of Profit

1. CapEx typically separate from NOI
2. buyers will include CapEx above the NOI line (to reduce NOI and the perceived value),
3. sellers will include CapEx below the NOI line (to increase NOI and the perceived value)
4. Cash flow before taxes = NOI – Debt service – Capital expenses + Loan additions
   1. loan additions = cash-out refi & interest earned

CHAPTER 16 – Return on Investment (ROI)

1. ROI = (Ending value – Starting value) ÷ (Starting value)
2. ROI and interest rate are essentially the same thing
3. Annualized ROI = ROI ÷ Years held

CHAPTER 17 – Equity Multiplier (EM)

1. EM = Ending value ÷ Starting value

CHAPTER 18 – Capitalization Rate (As a Metric)

1. Cap rate = NOI ÷ Value

CHAPTER 19 – Cash-on-Cash Return (COC)

1. COC = Annual cash flow ÷ Cash invested

CHAPTER 20 – Average Annual Return (AAR)

1. AAR = (ROI-1 + ROI-2 + … + ROI-N) ÷ Years held
2. negative ROI will distort the return. Negative % usually has a larger base, aka a larger absolute number. So the actual return will be lower than AAR if there are negative ROIs
3. large ROI fluctuation (like 30% – 1% – 2%) will distort the return. If large ROI happens with small base, it will distort AAR upwards. If large ROI happens with large base, it will distort AAR downwards.

CHAPTER 21 – Compound Annual Growth Rate (CAGR)

1. AAR will always be higher than the real growth rate
2. CAGR = power(Ending value ÷ Starting value, 1 ÷ n) – 1
3. Excel function: RRI(nper, pv, fv)
4. Manipulation of CAGR: if a property has a mediocre first 2 years, then 3 good years, it is easy for seller to inflate numbers by choosing the 3-yr CAGR, instead of 5-yr CAGR
5. CAGR is not for a property with multiple inflows and outflows along the tenure. (unfortunately that is true for super majority of rental investments)

CHAPTER 22 – Calculating Internal Rate of Return (IRR)

1. XIRR( ) function in xcel
2. IRR allowed me to combine the benefits of both appreciation and cash flow. For some properties, you might forgo some CoC for higher appreciation. For some properties, you might want to demand high CoC for lower appreciation.
3. Limitation:
   1. based on estimates.
   2. it ignores the size of the project
   3. reinvest rate, reinvest timeline – IRR assumes the positive cashflow is invested 100% right away. If you cumulate the cashflow for 6month, or divert some of cash flow to other projects, the actual return will be lower than IRR.

CHAPTER 23 – Comparing Investments

1. rehab vs no-rehab – no-rehab IRR is a bit better than rehab. the initial rehab cost worths a lot along the way.
2. To be fair, for no-rehab, the extra cash that is not used has to be counted in IRR formula. Maybe it is a CD account, count the initial deposit & interest in.

CHAPTER 24 – Property Valuation

VALUATION BASED ON INCOME

1. discounted cash flow
2. capitalization rate
3. gross rent multiplier