Debt, of used correctly, can magnify rates of return on cash flow investments Let's begin by adding a couple of items to our basic income proforma: Potential Gross Income (PGI) This is the revenue the property could generate. less Vacancy and Collection Loss (VCL) This is the revenue that is not received because the space is vacant. Remember, a building con 3 have multiple spaces Effective Gross Income (EGI) PGI - VCL, or the rent collected considering any 10 vacancies 11 less Operating Expenses (OE) These are the expenses the building incurs. Things 12 like property taxes, utilities, maintenance and so on. 13 This does NOT include mortgage payments, mortgage payments are not Operating Expenses. 15 Net Operating Income (NOI) This is the magic number in real estate. It is the cash flow 16 the building generates ofter paying all the bills out of the 17 available revenue 18 less Debt Service (DS) This is the mortgage payment which consists of both 19 principal and interest 20 Before Tax Cash Flow After paying the debt payment, this is the cash avallable 21 to the investor, prior to any income tax obligations 22 23 24 Many times with investment real estate, there are two types of returns discussed: 25 Unleveraged: This is the NOI divided by the cost of the property 26 Leveraged: This is the BTCF divided by the equity investment, or the amount not borrowed. 27 28 Consider this investment: 29 Purchase Price: $1,000,000 30 NOI: $100,000 31 32 What is the unleveraged return? (26-2) 33