Cash flow is what actually lands in the owner's pocket in a period: net operating income minus the mortgage payment and minus the capital dollars the building consumed. A property can show a healthy NOI and still produce thin or negative cash flow once the loan and the roof have been paid. Income is an opinion until it clears these two tolls.
Cash flow=NOI − Debt service − Capital expenditures (CapEx)
- NOI
- The property's operating result for the year, before any financing.
- Debt service
- Twelve months of principal and interest on the loan in place.
- Capital expenditures (CapEx)
- Roof, systems, windows, and other work that extends the building's life, funded from reserves or out of pocket.
- The only line that reaches an owner's pocket. NOI is the building's result; cash flow is the owner's.
- Blind to appreciation, principal paydown, and tax treatment, any of which can outrun cash flow in total return.
- Sellers and lenders quote NOI because it is the flattering number. The loan and the roof come out afterward.
- Thin cash flow is a risk position before it is a bad deal: it removes the margin for one bad quarter.
The same building, financed with the loan the coverage test allowed.
Eighty-eight thousand dollars of income arrives as under ten. One long vacancy, or one roof, and the year is negative.
Related terms
All termsNOI (Net Operating Income)
Net operating income is what a property earns from operations in a year: all collected income minus operating expenses, before any mortgage payment, income tax, or capital projects.
FinanceDSCR (Debt Service Coverage Ratio)
The debt service coverage ratio is net operating income divided by the annual loan payment.
FinanceLeverage
Leverage is using borrowed money to control a larger asset than cash alone would buy.
Terms arrive with the writing.
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