01Determine the Gross Operating Income (GOI)

  • The first step in evaluating the cash flow of a commercial real estate property is to determine the Gross Operating Income (GOI). GOI is the total income generated by the property before deducting any operating expenses. It includes the rental income from tenants, parking fees, and any other sources of revenue.
  • To calculate the GOI, add up all the income generated by the property over a given period. This can include monthly rental income, late fees, utility reimbursements, and any other revenue streams. It is important to consider all possible sources of income to get an accurate picture of the property's revenue potential.

02Deduct Operating Expenses

  • After determining the GOI, the next step is to deduct the operating expenses. Operating expenses are the costs associated with running and maintaining the commercial property. These expenses can include property taxes, insurance, property management fees, maintenance and repairs, utilities, and any other expenses related to the property's operations.
  • To calculate the Net Operating Income (NOI), subtract the operating expenses from the GOI. NOI is a critical metric for evaluating the financial performance of a commercial property, as it represents the property's profitability before accounting for debt service and other financing costs.

03Consider Debt Service

  • Debt service refers to the regular payments made towards the mortgage or loan used to finance the commercial property. When evaluating the cash flow, it is important to consider the debt service as it directly affects the property's net cash flow.
  • Subtract the debt service from the NOI to calculate the property's net cash flow. This will give investors a clear understanding of how much cash the property is generating after accounting for all expenses, including financing costs.

04Analyze Cash-on-Cash Return

  • Cash-on-Cash return is a useful metric for evaluating the profitability of a commercial real estate investment. It measures the annual return on the actual cash invested in the property.
  • To calculate the Cash-on-Cash return, divide the property's net cash flow by the total cash invested, including the down payment, closing costs, and any other upfront expenses. This percentage represents the return on investment based on the cash invested in the property.

Conclusion

Evaluating the cash flow of a commercial real estate property is a crucial step in determining its financial performance and profitability. By carefully considering the Gross Operating Income, deducting operating expenses, accounting for debt service, and analyzing the Cash-on-Cash return, investors can make informed decisions about their real estate investments. It is important to conduct a thorough evaluation and seek the advice of experienced professionals to ensure a successful investment strategy.

MethodsDetails
Step 1Determine the Gross Operating Income (GOI)
Step 2Deduct Operating Expenses
Step 3Consider Debt Service
Step 4Analyze Cash-on-Cash Return
cash flow
commercial real estate
property evaluation
profitability
return on investment