The cash-on-cash return (also called the equity dividend rate) is the ratio between the property’s cash flow in a particular year (usually before taxes) and the amount of the initial capital investment. It is expressed as a percentage.

It is common to pay professional property managers a percentage of collected rent, so for this example you’ll assume that 5% of the gross operating income (GOI) is a fair amount to add to your APOD as the value of that service.

Debt coverage ratio (DCR) is the ratio between the property’s net operating income (NOI) for the year and the annual debt service (ADS). If your NOI and ADS are exactly the same (say $10,000), then the ratio is 10,000 divided by 10,000, or exactly 1.00. A DCR of 1.00 implies that you have exactly enough net income from the property to make your

For example, utilities, supplies, snow removal, and property management are all operating expenses. Repairs and maintenance are operating expenses, but improvements and additions are not—they are capital expenditures. Property tax is an operating expense, but your personal income tax liability generated by owning the property is not. Your mortgage

Vacancy and credit loss is the potential rental income that is lost due to space that lies unoccupied or due to nonpayment of rent by tenants. You’ll use vacancy and credit loss to reduce the gross scheduled income (i.e., the property’s total potential income) to give you the gross operating income (GOI), which is the amount of revenue you actually

Debt Coverage Ratio = Net Operating Income / Annual Debt Service A property with a 1.20 debt coverage ratio has income before debt service that is 1.20 times as much as the debt service—in other words, the property generates 20% more net income than it needs to make its mortgage payments.

You should know about the break-even ratio (BER, also sometimes called the default ratio) because it is a benchmark often used by lenders when underwriting commercial mortgages. Its purpose is to estimate how vulnerable a property is to defaulting on its debt should rental income decline. There is an old saying that when your outgo exceeds your

You’re more likely to encounter surprise expenses than surprise income, so be realistic when forecasting the cash flow from a property you plan to buy. Do you expect the cash flow to be small or nonexistent? If so, the reality may well prove to be that you’ll actually have a negative cash flow. This means you would need to inject your own personal

point, however, is the question of the rental rates. Do the leases agree with the seller’s representations? How long does each lease run? Do tenants have options to renew and at what rates?