If you understand these terms properly,
✔ reading property deals becomes easy
✔ Excel models make sense
✔ valuation logic becomes clear
1. Gross Rent (Gross Rental Income)
Gross Rent is the total rent a property can earn if everything goes perfectly.
Example:
Monthly rent = ₹20,000
Annual gross rent = ₹20,000 × 12 = ₹2,40,000
👉 This assumes:
No vacancy
No rent default
💡 Gross rent is the starting point of every real estate model.
2. Vacancy Rate
Vacancy Rate means the percentage of time the property stays empty.
Why vacancy exists:
- Tenant leaves
- Market slowdown
- Repairs
- No demand
Example:
Vacancy rate = 5%
Gross rent = ₹2,40,000
Vacancy loss = 5% of ₹2,40,000 = ₹12,000
👉 Vacancy reduces your actual income.
3. Effective Gross Income (EGI)
Effective Gross Income is the actual rent you expect to receive, after vacancy loss.
Formula:
EGI = Gross Rent – Vacancy Loss
Example:
Gross rent = ₹2,40,000
Vacancy loss = ₹12,000
EGI = ₹2,28,000
💡 This is more realistic income.
4. Operating Expenses
Operating Expenses are regular costs required to run the property.
Common Operating Expenses:
- Maintenance charges
- Property tax
- Insurance
- Repairs
- Security
- Property management fees
❌ Loan EMI is NOT an operating expense.
| Expense | Amount (₹) |
|---|---|
| Maintenance | 30,000 |
| Property Tax | 15,000 |
| Insurance | 5,000 |
| Repairs | 10,000 |
| Total Expenses | 60,000 |
5. Net Operating Income (NOI)
NOI = Income from property after expenses, before loan payments.
Formula:
NOI = Effective Gross Income – Operating Expenses
Example:
EGI = ₹2,28,000
Expenses = ₹60,000
👉 NOI = ₹1,68,000
💡 NOI is used for valuation, cap rate, and investment decisions.
6. Capital Expenditure (CapEx)
CapEx means big, long-term expenses that increase property life or value.
Examples:
- Lift replacement
- Roof repair
- Major renovation
- Structural changes
💡 CapEx is different from regular maintenance.
7. Cash Flow
Cash Flow is money left in your hand after all payments.
Types:
- Cash Flow Before Loan
- Cash Flow After Loan
Example:
NOI = ₹1,68,000
Loan EMI = ₹1,20,000
👉 Cash Flow = ₹48,000 per year
Positive cash flow = good
Negative cash flow = risky
8. Capitalization Rate (Cap Rate)
Cap Rate shows how much return a property gives based on its income.
Formula:
Cap Rate = NOI / Property Value
Example:
NOI = ₹2,00,000
Property value = ₹40,00,000
Cap Rate = 2,00,000 / 40,00,000 = 5%
💡 Lower cap rate = expensive property
💡 Higher cap rate = higher risk or better return
9. Holding Period
Holding Period is how long you keep the property before selling it.
Common Holding Periods:
5 years
7 years
10 years
💡 Used heavily in DCF modelling.
10. Exit Value (Sale Value)
Exit Value is expected selling price of the property in the future.
Example:
Property bought at ₹50L
Expected value after 10 years = ₹80L
👉 Exit Value = ₹80L
11. Appreciation Rate
Appreciation Rate is annual growth rate of property value.
Example:
Appreciation = 6% per year
₹50L → ₹80L in 10 years
💡 Small changes in appreciation hugely impact returns.
12. Loan-to-Value (LTV)
LTV shows how much loan is taken compared to property price.
Formula:
LTV = Loan Amount / Property Value
Example:
Property price = ₹50L
Loan = ₹35L
👉 LTV = 70%
Higher LTV = higher risk
Lower LTV = safer investment
13. Equity
Equity means your own money invested in the property.
Example:
Property price = ₹50L
Loan = ₹35L
👉 Equity = ₹15L
Mini Case Study: Why Terms Matter
Property Deal:
Price = ₹60L
Gross rent = ₹30,000/month
Vacancy = 8%
Expenses = ₹90,000/year
Without knowing terms → confusing
With terms → clear analysis:
Gross rent = ₹3,60,000
Vacancy loss = ₹28,800
EGI = ₹3,31,200
NOI = ₹2,41,200
👉 Now decision becomes logical.
Chapter 3 Summary (Quick Revision)
- Gross rent ≠ actual income
- Vacancy reduces rent
- Expenses reduce profit
- NOI is the heart of real estate
- Cash flow is real money
- Cap rate helps valuation
- Holding period & exit value decide profit
What Comes Next – Chapter 4 Preview
Next chapter you’ll learn:
- Excel basics needed for real estate modelling
- How professionals structure models
- Timeline creation (Year 0, Year 1…)
Read More: Understanding How Real Estate Makes Money