Monday on “Your World w/Neil Cavuto” (Fox News, Oct 6, 2008) Donald Trump announced that he is not slowing down his real estate investing activity during our slumping economy. On the contrary, Trump made it clear there are good real estate opportunities to be had at “fire sale” prices that real estate investors should capture.

So how are you reacting to this financial chaos? Are you investing, or has this uncertain financial market got you frozen in your tracks? If you are frozen, you might be missing one of the best opportunities to invest in real estate that we’ve had in a long time. Consider this:

1. There are numerous “fire sale” deals available for real estate property throughout the United States
2. Interest rates are still generally favorable
3. Our economy will survive, so it’s just a matter of time before your investment in real estate is worth more than you pay for it by virtue of a greater demand for it

This is not the time to bury your money under a mattress. Yes, it’s comforting to be able to put your hands on it quickly, and perhaps like Donald Duck’s eccentric Uncle Scrooge, be able to roll around in it, but it will cost you big time. Inflation alone will devalue your money; your money won’t be worth as much next year as this year.

Here’s a better suggestion.

First, develop an investing plan. Then locate a real estate professional in your area that understands income-producing property and has a track record for investment property sales and build a relationship. Let him or her know what your investment objectives are and have them start looking for profitable investment opportunities.

If you know enough about the nuances of real estate investing and have a good understanding of your local real estate market, great. Then start kicking the bushes yourself.

The point is not to neglect doing something. This slumping financial market is unnerving, certainly, but our economy will survive and bounce back and what you invest into today will make you money tomorrow. If you have the financial means to invest in real estate without jeopardizing your welfare, then this is not the time to run for cover and hide. Instead, follow in the tracks of the Donald, during this slumping economy, look for, pursue, and seize investment opportunities with abandon.

Many people make the mistake of not investing in real estate because they can’t stomach property management issues. It’s true. Some people do not engage in real estate investing because the idea of having to deal with tenants and property repairs seems too annoying.

The good news for real estate investors, however, is that there are options that would allow real estate investors to become insulated from a property’s day-to-day operations. Here’s the key: Simply decide how involved you want to become in its operation before venturing into your real estate investment. Consider your property management options:

1. You can handle everything yourself. You can deal with the tenants and repairs.
2. You can hire a resident manager who lives in the building and takes care of all the minor, day-to-day problems that may arise. You are still in charge of renting apartments, collecting rents and paying bills.
3. You can employ a professional property management company to handle the renting, bookkeeping, and management end of the property operation. You are then left with a management-free investment. This, of course, costs money and reduces your overall return but, depending on your individual situation, you can be as active or inactive in the day-to-day operation of your investment as you wish.

Here’s the important thing: Do not pass up real estate investing because you are too busy to take care of it yourself. There are options. Even after paying the cost of a full property management team, your rewards from your real estate investment will still far exceed any of your other investments.

Real estate investors define net operating income as annual gross potential rental income from a property less vacancy and collection losses, operating expenses, replacement reserves, property taxes, and property and liability insurance.

Here’s how a typical net income statement might look for any-size rental income property.

Income Statement (Annual)

1. Gross scheduled income
2. Vacancy and credit losses
3. Effective gross income
4. Other income, e.g., laundry, parking and storage areas
5. Gross operating income

Less operating and fixed expenses

6. Property taxes
7. Property and liability insurance
8. Water and sewer
9. Trash pickup
10. Property management fees
11. Electric
12. Repairs and maintenance
13. Advertising and promotion
14. Landscaping
15. Miscellaneous, e.g. application fees, key fees, late fees
16. Replacement reserves
17. Net Operating Income

The following list explains each of the lines in the net income statement:

1. Gross scheduled income - This amount is the largest possible sum of rents that you could theoretically bring in at current market rent levels and 100 percent occupancy.
2. Vacancy and collection losses - Even the best-managed apartments experience some vacancies when apartments turn over. As a practical matter, therefore, also add in some losses even when all units in the building are rented.
3. Effective gross income – This term refers to the actual amount of cash that an owner receives net of vacancy and collection but before any other income.
4. Other income – This represents the income a landlord collects from such things as a coin-operated laundry facility, parking garages, and storage areas.
5. Gross operating income - This term refers to the actual amount of cash that an owner receives before operating and fixed expenses.
6. Property taxes - This item includes city, county, and state taxes annually assessed against the property.
7. Property and liability insurance - This insurance reimburses for property damage caused by fire, hail, windstorms, sinkholes, hurricanes, and other perils. It also pays to defend against, and compensate for, lawsuits alleging owner negligence, e.g., slip and-fall cases.
8. Water and sewer – This is self-explanatory.
9. Trash pickup - This is self-explanatory.
10. Management fees – What the owner of the apartments pays to manage the property. Always show an amount for management, even when the landlord self-manages the apartment. After all, he should pay himself the same amount he would otherwise have to pay a property management firm.
11. Electric – Tenants pay their unit utilities, but the property owner pays for lighting in the hallways, basement, laundry room, grounds, and parking area.
12. Repairs and maintenance – This reflects costs associated with cleaning, painting, and making small repairs around the property. Always show some amount, even when the owner does the work.
13. Advertising and promotion – The costs associated with a For Rent sign that’s posted on the property, newspaper ads, referral fees, and the Yellow Pages.
14. Landscaping - Yard care costs. In some cases, the owner might pay this amount to one of the tenants to keep the grass cut, rake leaves, and shovel snow off the walks.
15. Miscellaneous - This expense covers legal fees, supplies, snow removal from the parking lot, municipal assessments, auto mileage to and from the property, and other items not accounted for elsewhere in the income statement.
16. Replacement reserves - Building components subject to wear and tear such as the roof, plumbing, appliances, and carpeting must be replaced periodically. For the purposes of the income statement, these replacement costs should be averaged out annually.
17. Net operating income (NOl) - After you itemize and total all operating expenses, subtract this amount from the gross operating income to compute the net operating income (NOI).

Okay, let’s consider some final thoughts.

When you calculate NOI, make sure you include all expenses for the coming year, and never accept a seller’s income statement as accurate; ask to see the seller’s tax return IRS Schedule E for the subject property. Even if the seller is perfectly truthful in reporting last year’s income and expenses, always estimate how each of those figures might move up or down in the coming years; you’re buying the future, not the past.

Here’s more. Are property tax assessments headed up? Are vacancy rates (or rent concessions) increasing? Have utility companies scheduled any rate hikes? Has the seller deferred maintenance on the property? Has the owner allocated enough maintenance expenses to cover replacement reserves? Has the seller self-managed or self-maintained the property and therefore omitted these items as cash expenses?

Just bear in mind, that when it comes to calculating NOI, accept nothing on faith; prudent real estate investors thoughtfully reconstruct seller-prepared net income statements without hesitation. So should you.