Checklist for cash flow calculations
1. Revenues
- Gross Potential Income
- Miscellaneous Income
1.1. Gross potential income
The initial revenue analysis step is to calculate the property’s gross potential income. It is calculated by multiplying the total number of units by the potential rent for each unit.
Formula -
Gross Potential Income = Total Units × Potential Rent per Unit
1.2. Miscellaneous income
Miscellaneous income is the sum of all additional sources of income, such as parking fees, laundry income, or late fees.
2. Effective gross income
Effective gross income is calculated by subtracting vacancy and credit loss from the gross potential income.
Formula
Effective Gross Income = Gross Potential Income - Vacancy and Credit Loss
3. Operating expenses
- Percentage of Effective Gross Income
- Dollars per Unit
- Dollars per Square Foot
3.1. Percentage of effective gross income
Percentage of effective gross income is the ratio of total operating expenses to effective gross income, expressed as a percentage.
Formula
Percentage of Effective Gross Income = (Total Operating Expenses / Effective Gross Income) × 100
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3.2. Dollars per unit
Dollars per unit represents the operating expenses per unit, providing a standardized comparison across different property sizes.
Formula
Dollars per Unit = Total Operating Expenses / Total Units
3.2.1. Fixed expenses
Fixed expenses remain constant regardless of property occupancy. They include property taxes, insurance, and management fees.
3.2.2. Variable expenses
Variable expenses fluctuate with property usage. These include utilities, maintenance, and repairs.
3.3. Dollars per square foot
Dollars per square foot represents the operating expenses per square foot of the property’s total area.
Formula
Dollars per Square Foot = Total Operating Expenses / Total Square Feet
4. Net operating income (NOI)
NOI is the difference between effective gross income and total operating expenses.
Formula:
NOI = Effective Gross Income - Total Operating Expenses
4.1. Debt service
Debt service is the regular payment of principal and interest on loans.
5. Before-tax cash flow
Before-tax cash flow is the income remaining after deducting debt service from NOI.
Formula:
Before-Tax Cash Flow = NOI - Debt Service
6. After-tax cash flow
After-tax cash flow considers the impact of income taxes on cash flow.
Formula:
After-Tax Cash Flow = Before-Tax Cash Flow - Income Tax
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