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Calculating Revenue Property
from: ...Tip! Next you will need to decide what sort of property it is you want to purchase, is it an apartment, townhouse of a finca (country house with land). You may even want to take on the challenge of buying a property that needs renovation.
What is revenue property? What does it mean? The meaning revenue in the dictionary says: Yield from property or investment; income. I mean cashflow. Cashflow meaning what is left over once all the variables are subtracted off of the balance sheet. Let us look at what determines cashflow:
First we must look at INCOME: Income is rent, parking, laundry, or other sources. Other sources could be a billboard or renting out the garage. This is called the "Gross Operating Income", or GOI.
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Because the income fluctuates with renters and advertisers coming and going, we subtract an amount for vacancy loss. Most professionals use 5%+ depending on the area. When subtracted from the Gross Operating Income, we are left with the "Effective Gross Income", EGI .
Second we must look at EXPENSES: Expenses are maintenance, taxes, utilities (heat, electricity, water), insurance, possibly management fees and of course miscellaneous items that pop up. By adding up all of the above, you have the "Total Operating Expenses", TOE .
To determine the cashflow of the revenue property you must do the math: By taking the "Effective Gross Income", EGI and minus the "Total Operating Expenses", TOE you are left with the "Net Operating Income", NOI .
The last step to calculate is the "Annual Debt Service", ADS , which is the yearly sum of all your mortgage payments.
Tip! Your estate agent should be in the position to show you documentation to support any recommendations. This includes information about recent sales, property currently listed for sale and recently expired listings in the local area.
Now we have our formula:
Cashflow = NOI-ADS
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