How do you define cash flow? Rent less PIMI or Rent less PIMI &?

Question

How do you define cash flow? Rent less PIMI, OR, Rent less PIMI and what else. Trying to make sure I do future deals right. Any views will be appreciated.

Jake S. · Answer

Hey @Eric Boakye+Rent- Mortgage, Taxes, Insurance- Repairs, capex, vacancy & management= Net Cash FlowThat's how I personally view it

Account Closed · Answer

@Eric Boakye

Glad to hear you're giving this deal some thought. Where many people go wrong is not including an estimated % for capex, vacancies, repairs.

I can't say whether this is a good or bad deal, but definitely make sure you include EVERY EXPENSE when calculating your cash flow.

Account Closed · Answer

@Eric Boakye

(Rent) - (PITI) - (all other fixed expenses such as lawncare, utilities, HOA fees, etc.) - (estimated* % for capex, vacancies, repairs).

*the "estimated %" may vary slightly between investors. If it helps, I use 25% of gross rents for this.

Chris Seveney · Answer

@Eric Boakye

Cash flow is income - expenses but I recommend you follow a logic of first starting with Net operating income (NOI). This is all revenue from the property minus all reasonably necessary operating expenses.

NOI is a before-tax figure that excludes principal and interest payments on loans, capital expenditures, depreciation, and amortization.

NOI is what is used to value a property. You then add in your debt service etc to determine your “cash flow after debt service”

The higher the DSCR is above 1.00 the better

John Teachout · Answer

All the expenses have to be deducted from the gross rent. If you don't include all the actual and projected costs, it's just "pretending" that there's cash flow. There WILL be maintenance expenses, There WILL be capital expenses and so forth. People still buy properties with negative cash flow but it's important to be fully cognizant of that and not a surprise.

Eric Boakye · Answer

Thanks @Jake Stuttgen

Running some numbers and any additional expenses in addition to Mortgage ( Principal & interest), Taxes and insurance starts putting me in the negative, although there is good equity in the deal.

Eric Boakye · Answer

Thanks @CJ M.

Need to be re-evaluating my deal: about $50k in possible equity, but the expenses will swallow up the rental income. Need to re-think.

Eric Boakye · Answer

@Chris Seveney

Can you please explain how you work this? Trying to make sure I understand how you achieve a good return in this type of investment.

Thanks so much for enlightening me!

Chris Seveney · Answer

That’s why I like notes. If you take a property back your typical at a 2-3% rule. Most are cash vs appreciation plays but you can hold for 3-4 years and then sell and make a nice return if they are managed properly

Eric Boakye · Answer

@Chris Seveney

Thanks again!!

You know, I am following the 1% rule and it is really difficult to find deals that fit this rule these days if you take into account the debt service cost + insurance, in addition to Capex and vacancy as well as maintenance. As an accountant it throws my math out, but I am guessing there are deals out there that will fit it. Will keep searching for the gems.

Thank you for the comment - much appreciated!

How do you define cash flow? Rent less PIMI or Rent less PIMI &?

How do you define cash flow? Rent less PIMI or Rent less PIMI &?

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