Real Estate Financial Modelling for Newbies: Grab the fundamentals in less than 50 pages (Real Estate Investment) by Susanto / Hoang Ervin / Linh

Author:Susanto / Hoang, Ervin / Linh [Susanto / Hoang, Ervin / Linh]
Language: eng
Format: epub
Published: 2018-02-20T00:00:00+00:00

NOI Entry Yield

3.4%

3.0 - 4.0%*

NOI Entry Yield is still within the market range, this justifies the purchase price of our Subject Property

Average NOI Margin

77%

70 - 85%

NOI Margin is still within the market range, this justifies our property income and expenses of our Subject Property

*This refers to the cap rates for office properties in Singapore. Note that unlike rents, property cap rates are not commonly reported in reports. A way to estimate a cap rate will be to gather data on transacted property deals

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3.5 Corporate Income Tax (CIT)

Income tax will be the last expense to derive Net Income or Operating Cash Flow. Tax rate will differ by countries; e.g. Singapore will be 17% and Malaysia will be 24% (tax rates are easily available online).

Unlevered Operating Cash Flow: Tax = NOI x Tax Rate

Tax will be 0 if NOI is not a positive number

Levered Operating Cash Flow: Tax = (NOI - Financing Expenses) x Tax Rate

Tax will be 0 if (NOI - Financing Expenses) is not a positive number

From this formula, it is understood that debt financing does not only boost returns due to positive leverage but also minimises tax by reducing taxable income. If there are any other expenses below the NOI line, remember to include them to calculate the taxable income (only if they are confirmed to be tax-deductible expenses, have a read on the country’s tax guides to understand better). These formulas assume that there is no other expense item besides financing costs.

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3.6 Operating Cash Flow (OCF)

Putting it all together, OCF is calculated using the formulas below, depending on whether leverage is used:

Unlevered Operating Cash Flow (UOCF)

(Revenue - Operating Expenses = NOI) - Tax = UOCF

Levered Operating Cash Flow (LOCF)

(Revenue - Operating Expenses = NOI) - Financing Expenses - Tax = UOCF

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