How to Determine Cash Flow for an Investment Property

An office building's cash flow can help measure its investment performance.

Calculating an investment property's cash flow is an important step in measuring its value and profit potential. Cash flow is the amount of cash a property generates annually after its expenses and mortgage payment have been paid. You can calculate a property's cash flow, which can be either positive or negative, on a before-tax or after-tax basis. If a property has negative cash flow, its owner may not be able to make the property's mortgage payment and pay its operating expenses. An investment property with high positive cash flow will likely have a higher value than a similar property with low cash flow.

Instructions

1. Multiply an investment property's rentable square feet by the annual rental income per square foot to calculate gross rental income. For example, if an office building has 10,000 rentable square feet and tenants pay $24 annually per square foot, multiply 10,000 by $24 to get $240,000 in gross rental income.

2. Subtract the amount of money the property loses due to vacancy and nonpaying tenants from gross rental income. Then add any other income, such as parking fees, to calculate effective gross income. In the example, if the property loses $10,000 due to vacancy and nonpaying tenants and generates $5,000 in other income, subtract $10,000 from $240,000 to get $230,000. Then add $5,000 to $230,000 to get $235,000 in effective gross income.

3. Subtract the property's total annual operating expenses, such as salaries, maintenance and utilities, from its effective gross income to calculate the property's net operating income. In the example, if total annual operating expenses are $85,000, subtract $85,000 from $235,000 to get $150,000 in net operating income.

4. Subtract the property's debt service, which includes all mortgage payments, from net operating income to calculate before-tax cash flow. In the example, if debt service is $60,000, subtract $60,000 from $150,000 to get $90,000 in before-tax cash flow.

5. Subtract the property's annual income tax expense from before-tax cash flow to calculate after-tax cash flow. In the example, if annual income taxes are $35,000, subtract $35,000 from $90,000 to get $55,000 in after-tax cash flow.

Tips & Warnings

• If a property has no mortgage, its net operating income would be its before-tax cash flow.

References

• Property-Investing.org: Before-Tax Cash Flow
• University of Texas-San Antonio College of Business: Value, Leverage and Capital Structure