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Income Property Cash Flow Analysis
Before-Tax Cash Flows
The before-tax cash flows applicable to real estate analysis and problems
are:
• Potential Gross Income
• Effective Gross Income
• Net Operating Income (also called Net Income Before Recapture.)
• Cash Throw-off to Equity (also called Gross Spendable Cash)
The derivation of these cash flows follows a set sequence:
1. Calculate Potential Gross Income by multiplying the rent per unit times the
number of units, times the number of rental payments periods per year.
This gives the rental income the property would generate if it were fully
occupied.
2. Deduct Allowance for Vacancy and Rental Loss. This is usually expressed
as a percentage. The result is Rent Collections (which is also Effective
Gross Income if there is no "Other Income").
3. Add "Other Income" such as receipts from concessions (laundry
equipment, etc.), produced from sources other than the rental office space.
This is Effective Gross Income.
4. Deduct Operating Expenses. These are expenditures the landlord-investor
must make, by contract or custom, to preserve the property and keep in
capable of producing the gross income. The result is the Net Operating
Income.
5. Deduct Annual Debt Service on the mortgage. This produces Cash Throw-
Off to Equity.
Thus:
Effective Gross Income =
Potential Gross Income - Vacancy Loss + Other Income.
Net Operating Income =
Effective Gross Income - Operating Expenses.
Cash Throw-Off =
Net Operating Income - Annual Dept Service.
Example: A 60-unit apartment building has rentals of $250 per unit per
month. With a 5% vacancy rate, the annual operating cost is $76,855.
The property has just been financed with a $700,000 mortgage, fully
amortized in a level monthly payments at 11.5% over 20 years.
a. What is the Effective Gross Income?
b. What is the Net Operating Income?
c. What is the Cash Throw-Off to Equity?
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