I wrote a post a last week about building long-term wealth and had a few readers respond with questions. You can view the post with the following link. (http://mandrellco.com/building-long-term-wealth-real-estate/) One of the questions I received was concerning how to quickly calculate a property’s cash flow and expenses, … so I wanted to share the form I use to accomplish this. You can download the form below and I’ve also provided some quick notes on a few of the forms line items.
Note: The attached form uses annual amounts but I will use monthly figures for my examples
Total Gross Income: Gross income is the total amount of income the property is producing. This will include income from rents, laundry, storage, parking, and any other sources connected to the property.
Vacancy Allowance: It’s assumed that your property will not stay occupied 100% of the year. People will move out and new people will come in. Vacancy allowance is the estimated portion of the year where you do not have a tenant paying you rent. I did not include vacancy allowance in the example from my previous post to avoid making calculation more difficult than needed. If we had included vacancy allowance I would have used the national average rate of 8% and multiplied that with my gross income of $4500.
Effective Gross Income: Effective Gross is Total Gross Income minus Vacancy Allowance ($4500 – $360=$4140)
Net Operating Income: NOI is simply your Effective Gross Income minus your Total Expenses.
Debt Service: Your debt service is your total monthly principal and interest payments on your mortgage. Many times borrowers chose to combine (escrow in) their taxes and insurance, while this cash flow sheet breaks these expenses into separate categories. The reason this is done is because your mortgage is a “variable expense” so to speak. If one investors puts down 20% and finances the property over 15 years and another investors places down 3.5% and finances it over 30 years, their payments will be complete different. Taxes and insurance will not vary from investor to investor, so they must be removed and shown in their own expense category to get total picture of what the investments true expenses are.
Hope this helps!