NOI is, by definition, dependant on operations. In other words, use that method if there are some expenses associated with owning and operating the property. If you have only cash income with no expenses, such as NNN leases, then you use discounted cash flow to value the property.
Discounted cash flow means: "What would someone pay today in order to receive a steady stream of income over some period of time?" That analysis requires you to decide how much risk is involved with the stream of income stopping earlier than anticipated, and how long it will take you to earn all your money back.
If the money is coming from an NNN lease with Wal-Mart as a tenant, you are probably fairly confident you will receive all your rent payments for the next thirty years.You would have a small risk, so you would be willing to accept a modest return on your money, maybe 5%. If the money is coming from an NNN lease with "Uncle Charlie's BBQ Pit," you might think there was a greater possibility of default and want to earn a higher return, maybe around 15%. Every investor must make those decisions for him- or herself.
When a lender loans money to you, he or she thinks: "I am going to loan out US Dollars 100,000 today and be repaid over the next twenty years. What interest rate do I want to earn in order to be willing to do that?" If you have good credit, you will receive a lower interest rate. If you have terrible credit, you will be charged a higher interest rate. Short-term loans usually have lower interest rates than longterm loans.
If the lender thought in terms of discounted cash flow, he or she might say, "Someone is willing to pay me US Dollars 733.76 per month for the next thirty years. The total of those payments will be US Dollars 264,153. If I want to earn 8% interest on my money, how much will I loan him or her today so that all the payments, over time, will result in 8% annual interest?" The answer is US Dollars 100,000.
The calculations are a little more time-consuming than most people want to take on. They are easy, but have many steps. I recommend using one of the excellent online calculators to perform this chore. One of the easiest to use is on the website of a company called Money Toys. It has many different financial calculators, and it sells the online calculators to other people, such as real estate agents, to install on their own websites. There is no charge, however, to use the calculator on the Money Toys website.
A few simple negotiation skills are usually all you need to successfully purchase properties at a reasonable price. Nothing is guaranteed - some sellers are completely hardheaded - but you improve your odds as you improve your persuasive abilities.
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1. Cancun Real Estate Investing
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