How do I determine the cash flow potential?

*** The author of this blog, Ben Officer, is a licensed REALTOR® in the province of Alberta. The opinions expressed within this blog are those of the author and are simply that, opinions. The views expressed in this blog are not intended to advise you, as your needs may differ depending on your particular situation. The information provided in this blog is not guaranteed to be accurate and is subject to change at any time. For legal advice/information, please consult a lawyer. For mortgage advice/information, please contact a licensed Mortgage Associate. For tax advice/information, please consult an accountant. For investment advice/information, please contact a financial advisor. *** Blog Disclaimer - The information contained within this blog and posted by the author is believed to be true but cannot be guaranteed to be so. The author of this blog takes absolutely no responsibility for the comments posted by third parties on this blog.

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Wednesday, February 25, 2009

How do I determine the cash flow potential?

by Ben Officer on Wed, Feb, 25, 2009 11:57 AM

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Determining the cash flow potential of a revenue property

Will a potential revenue property be able to make you money? You must be able to “run” the numbers to make sure a property will provide the money you need.

The meaning of revenue in the dictionary says: Yield from property or investment; income. We mean cash flow.

Cash flow, which means what is left over once all the variables (bills) have been subtracted off of the balance sheet. Let us look at what determines cash flow:

First we must look at INCOME: Income is rent, parking, laundry, or other sources. Other sources could be a billboard or renting out the garage. This is called the “Gross Operating Income”, or GOI.

Because the income fluctuates with renters and advertisers coming and going, we subtract an amount for vacancy loss. Most professionals use 5%+ depending on the area. When subtracted from the Gross Operating Income, we are left with the “Effective Gross Income”,: EGI.

Next, we must look at EXPENSES: Expenses are maintenance, taxes, utilities (heat, electricity, and water), insurance, possibly property management fees and of course miscellaneous items that occur. By adding up all of the above, you have the “Total Operating Expenses”, TOE.

To determine the cash flow of the revenue property you must do the math: By taking the “Effective Gross Income”, EGI and minus the “Total Operating Expenses”, TOE you are left with the “Net Operating Income”, : NOI.

The last step to calculate is the “Annual Debt Service”, ADS, which is the yearly sum of all your mortgage payments.

Now we have our formula:

Cash flow = NOI- ADS

You will strive to get positive cash flow. You also want to be able to put some money aside for future repairs and upgrades, or if the property is not rented for a month or two.

You will want to make money on your revenue property, plus also hold on to it so it can (hopefully) appreciate in value over time.

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Edmonton, St Albert, & Area RE/MAX Real Estate Professional

Ben Officer, CD REALTOR®

How do I determine the cash flow potential?

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