![]() These items wear out over time and must be replaced. CapEx includes the large expenses like roofs, heat-and-air systems, driveways, and other structural items. What are capital expenses (aka CapEx)? They are THE real-life expenditure I see ignored by real estate investors more than any other at the time of purchase. But for those of us in the small residential investing world, the important thing to include are capital expense reserves. Here is the formula for cash flow from operations:įor commercial investors, this definition would also include deductions like leasing commissions and tenant improvements. ![]() While net operating income is important, its close cousin cash flow from operations (CFO) more accurately tells you what you need to know as an investor. But as you’ll see in the next section, the normal calculation for NOI is missing one critical ingredient. NOI is helpful because it begins to tell us how much cash flow we have available to pay lenders and equity partners. Here is a possible monthly net operating income calculation for that property: Capital expenses are something I’ll discuss more later in the article.Īn example with real-life numbers might be a house that rents for $1,500 per month. Mortgage expenses vary for each investor depending upon the financing amount and terms. Without paying these expenses, you would not be able to operate and rent the property.īut notice the expenses this formula does not include, like mortgage costs and capital expenses. These operating expenses are items you will likely write checks for some time during the year. These are called operating expenses, and they include things like vacancy reserves, management fees, property taxes, insurance, and maintenance. NOI tells us the income left over after paying all of our every-day rental expenses (not including financing). I have an 11-minute YouTube Video that explains this concept in detail, but I’ll also briefly share it with you here. Net Operating Income (aka NOI) is the foundational formula used to calculate rental property cash flow. The first cash flow calculation is Net Operating Income. This will help you negotiate the right price and financing terms that ensure a steady stream of cash flow to you for years. Since the goal of real estate investing is to pool as much cash as possible at the bottom of the waterfall, it’s critical to understand and correctly calculate all of the prior steps. That’s a long waterfall, isn’t it? There are a lot of opportunities for that precious cash flow to be diverted away from you. ![]()
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