COC calculation for underwriting

2 Replies

Artificial numbers that are easy to work with -

PP-$1,000,000

downpayment - $200,000

Capex - $100,000

Year 1 NOI - ($20,000)

Debt service - $50,000

Year 1 cash flow ($70,000)

So, basically , year 1 has negative NOI of $20K and negavtive cash flow of $70,000 for the property to be stabilized.

The investor sets up an operating account for year 1 expenses.  He sets aside $70,000, and it is withdrawn as needed.  all $70,000 becomes depleted on year 1. 

I'm getting a little confused as to how to properly calculate COC in this case.

1.  What is the total invested amount?  Is it ($200K+$100K=$300K), or ($200K+$100k+$70k=$370K)?

2.  If the total cash invested is the second scenario($370k), then is the year 1 cash flow still ($70k)?  It seems like the $70k is double counted in this case - It is accounted for in the initial investment AND it's counted again as negative cash flow on year 1.  It seems like if we account for $70K on the initial investment, the loss from year one is absorbed from the operating account and the year 1 cash flow is 0?

I would appreciate some clarification here.  Thanks

@Ki Lee the total investment in this scenario is $370k return is $0 

The return would only be negative if you come out of pocket to subsidize losses. Since you funded a reserve you do not have a loss at this point.

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