Calculating Annual Cash Flow
To begin, you’ll need to determine the Effective Gross Income (EGI) so you can determine the true income of the property and provide an accurate starting point.
To determine the Effective Gross Income, you’ll take the Gross Operating Income (GOI) and subtract vacancy and bad debts (calculate 2% – 4%). This will be the Effective Gross Income (EGI).
Now you’ll need to deduct expenses to determine the Net Operating Income (NOI).
From the Net Operating Income, you’ll need to deduct the Annual Debt Service (ADS) which includes mortgage, principle and interest to determine your Annual Cash Flow.
Calculating Return on Investment
To calculate the potential Return on Investment (ROI) on a property, you’ll divide the Annual Cash Flow by your Initial Investment which includes your down payment and any incurred costs for incidentals.
Example: Your annual cash flow is $4,000 and you have $50,000 invested, then you are making an 8% return on your money.
In any Agreement of Purchase and Sale proof of income statements as well as copies of expenses are required to ensure the accuracy of your ROI. These will include copies of leases, payments, utility bills, tax statements, etc.
Example: A five plex apartment building sold for $600,000 with the Buyer using a $150,000 down payment (25%) to avoid paying a CMHC insurance charge.
If you’ve found an investment property that you’re interested in, Contact Our Team so we can help you determine the potential ROI!