Cash Flow is the amount of money that remains after Debt Service is subtracted from Net Operating Income. Debt Service includes both the interest and principal reduction and is subtracted from Net Operating Income. A property owner will want to know if the property is producing sufficient NOI to pay the Debt Service. The equation needed to determine cash flow is:
Gross Potential Rental Income + Expense Reimbursements – Vacancy and Credit Loss + Miscellaneous Income = Effective Gross Income – Operating Expenses = Net Operating Income – Debt Service = Cash Flow |
Cash flow is often used to determine the owner’s return on investment (ROI). The ROI is one measure used by investors to determine if a potential investment is worth purchasing. It is calculated by taking the cash flow divided by the initial cash investment. One of the advantages of a Return on Investment calculation is it enables an investor to compare different types of investments, in order to decide which one to choose.
Annual Cash Flow/Initial Cash Investment = Return on Investment |
Reference
Occupational & Professional Licensing Administration (2011). Study guide for Property Managers examination. Department of Consumer and Regulatory Affairs, District of Columbia.
