Question

4 key line item that should be included in every buyer’s pro forma: Repairs ,Vacancy loss, Property management, Misc are each of these equally significant? Are they each equally difficult to assess in practice?

What impacts the net operating income ?

Answer 1

The four line items mentioned i.e. Repairs, Vacancy Loss, Property Management, Misc are each significantly relevant for a buyer's proforma. The reason for this is the amount of expenditure that the buyer would have to incur from his side or would have to pay in lieu of the maintenance and higher borrowing costs due to the above said things done with the property. Thus it is increasingly important for the buyer because this will ultimately impact his pocket.

They are not equally difficult to assess. Following are the ways in which they can be assessed to get a better understanding.

1. Repairs: They can be assesed by taking an approximation of the condition by interacting with the previous borrower. This will give a better understanding of the costs incurred.
2. Vacancy Loss: This can also be assessed by taking an approximation by following the same process as for the repairs. This can be done by assuming the time between which the earlier borrower was present and the time when you would be borrowing. A per day approximation would give you the quantitative figure for vacancy loss.
3. Property Management: Now this is something that is subjective and can be difficult to assess. However what can be assessed here to quantify is the neighbouring rate of management and all inclusive of maintenance, property rent and stuff. Thus this would give a rough idea about the same.
4. Misc : This would include all the other head items which might include taxation, utilitiy bills, intangible stuff which cannot be assessed and would only be assumed on paper just to quantify the same.

All the above quantitative stuff impacts net operating income because this would get deducted from the final rent or sale as General Administrative Expenses or Admin Expenses to say. Thus this would impact the net profit depending on what is the quantitative value of each of the head items above.