Following the introduction of benchmarking cash flow (1) with the link below, we will dive into more details of calculations.
http://bbs.wenxuecity.com/tzlc/515367.html
Let's start with some basic terms first:
CB: Initial Cost Basis = (Purchase Price) + ((Closing Cost) – (Loan related cost))
ACB: Initial Adjust Cost Basis = CB + (Cost for Initial Improvement)
OE: Annual Operation Expenses
NOI: Annual Net Operating Income = (Annual Gross Rent Income) – (OE)
CR%: Annual Cap Rate = NOI / ACB
AFI: Annual Financing Interest Cost
EB: Annual Equity Balance = ACB - (Annual Principal Balance)
NCF: Annual Net Cash Flow or Margin = (NOI – AFI)
ER%: Equity Return = NCF / EB
Notes:
1. CB should not include any loan related closing cost such as loan origination fees, points etc.
2. ACB could be tricky since you need to interpret what's the improvement vs. repair/maintenance cost. We can further discuss this topic later.
3. OE includes recurring expenses such as "Clean/Maint", "Mgmt/commission", Insurance, Repairs, Supply, "Property Tax", Utilities.
4. NOI does not include financing related cost such as mortgage interest cost.
5. EB should be adjusted based on the change of principal balance on annual basis. In normal circumstance, EB increases while principal balance decreases. Don’t confused EB with the equity based on the current market value. We only gauge the performance against to your investment capitol with your own cash including the incrementally earned rent income.
With CR% and ER%, you will be able fully measure the performance of each of your property with an apple-to-apple comparison. I will show some examples using this benchmarking method to illustrate how to analyze the cash flow performance in the next posting.
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