Key DNA terms and formulas are as follows:
- Gross Potential Income (GPI) – The GPI is the maximum possible rental income you will collect if all of the units are being rented. You calculate it on an annual basis. So, you would add up the rent on each unit and multiply the amount by 12, to calculate twelve months of collections.
- Vacancy Loss (VAC) – This is a loss in rent due to vacancies. It’s also important to anticipate that not everyone will pay all the rent all the time, which is referred to as collection loss.
- Effective Gross Income – This is the total income from possible rents minus VAC and collection loss.
- Other income (OI) – This is defined as money received from sources other than rent. Examples include washing/dryer machines, vending machines, parking fees, and application fees.
- EGI + OI = GOI – The GOI is the total amount of cash the property has available to pay expenses.
- GOI – OE = NOI –This is your operating expenses subtracted from your gross operating income. NOI is the income remaining after all expenses are paid, except for your mortgage payment. NOI is a key figure in all the calculations of a property’s value.
- NOI – RRA (Replacement Reserves Account) – An RRA is intended to be used for replacement costs of items that wear out, such as roofing, boilers, exterior paint, and parking areas.
- NOI – RRA – DS (Debt Service) – Debt Service is better known as your mortgage payment.
- GPI – VAC = EGI + OI = GOI – OE = NOI – RRA – DS = (Before Tax Cash Flow) or (BTCF) – This is the cash flow the property will produce, before considering taxes.