5 MISTAKES EVERY REAL ESTATE INVESTOR SHOULD AVOID FRANK GALLINELLI
will neither be able to create nor interpret an
Clearly, there are two vital problems with these
analysis of such property.
kinds of basic errors. First, is that they completely
derail any meaningful analysis. If your NOI is not
The examples that I’ve seen are numerous – I
really the correct NOI and your cap rate is not
can’t possibly list more than a few here – but they
really the correct cap rate, then nothing else about
all revolve around the same issue:
A lack of
your evaluation of the property can possibly be
understanding of basic financial concepts as they
correct. And second, if you give this misinformation
apply to real estate. Some of the most important:
to a well-informed
investor or lender, your
credibility will evaporate.
•
Net Operating Income – This is a key real
estate metric, and calculating it incorrectly can
The Bottom Line
play havoc with your estimation of a property’s
value. Basically, NOI is Gross Operating
Income
less
the
sum
of
all
operating
expenses, but I have frequently seen all kinds
of things subtracted when they should not be.
These have included mortgage interest or the
entire annual debt service, depreciation, loan
points, closing costs, capital improvements,
reserves
for
replacement,
and
waiting to happen? You could avoid many of these
errors by using the best, professionally developed
analysis models – but then, of course,