As you begin to dip your feet into the real estate investing field, you might notice that a lot of acronyms and terms are thrown around that aren’t widely understood by the general public. As a result, it’s important to define these conditions in order to help you make an educated decision when it comes to your investment. As a result, we decided to compile some terms and their definitions to help you with your next investing venture.
We can start simple. Cash flow can be easily defined as the income based on the property. There are a few additional factors that cause variations in how we estimate cash flow. Typically, investors are focused on the before-tax cash flow or CFBT. As described on Wikibooks, “When you know the cash flow, you can figure your return on your investment, calculate the tax shelter, and evaluate the investment, in other ways.” Cash flow, for the most part, is relatively simple to calculate with little to no real estate investing experience, but it is essential to know this to make an informed decision.
As Ken Horst explains, PITI stands for “Principal (P), Interest (I), property Taxes (T) and Insurance (I). This is basically the “bottom line” or the minimum you need to calculate when thinking about purchasing an investment property with a loan.” This amount is usually calculated on a monthly and overall basis so investors can calculate their expenses and the overall profit they need to bring in or leverage in order to pay for the property. By understanding these costs, you can better gauge the loan you might need or the price you need to charge for rent each month.
GSI and GOI
Gross Scheduled Income and Gross Operating Income go hand in hand, but it’s important to remember that the two are not interchangeable. GSI refers to your optimal income if everything went accordingly and you never experienced changeover periods. As James Kobzeff describes it, “GSI is the annual rental income a property would generate if 100% of all space were rented and all rents collected.” Unfortunately, GSI is not a perfect means to estimate your income, because renters don’t always pay on time and apartments sometimes go unrented for extended periods of time. You can think of GSI as the goal and GOI as the actual amount. Kobzeff goes on to say, “Consider GOI as the amount of rental income the real estate investor actually collects to service the rental property.” This number includes the amount lost due to missed payments and other extraneous cases as well as additional income sources related to the property like laundry or vending machines.