Rental Cashflow/Profit Worksheet?

Question

I saw in a book sometime in the past that had a worksheet to help determine if a rental would be profitable or not.  I cant seem to find it.

Does anyone have a worksheet that they use to determine if the numbers work out on a deal or not.  I looking at a property but not sure how much to offer for it.  I have done some rental research, but need a tool to figure the numbers, as I do not want to have negative cashflow.

Thanks,
Mike

Jason Barnett · Answer

Good topic.  Not sure what biggerpo has in mind, but here's the way I look at it.

First three terms: NOPAT, DCF and ROIC.

NOPAT = Net Operating Profit After Taxes.  You want to take all revenues (rents) and subtract all non-capital expenses (water, maintenance, taxes, basically everything except interest expense for loans)

DCF = Discounted Cash Flows.  There should be a formula in your Excel program to help you calculate this... you want to use the yearly NOPAT number as the payment... this is a critical concept in evaluating deals so be sure to google this for more detailed information.

ROIC = Return On Invested Capital.  This means: figure out the DCF for a deal and compare it with the total invested capital.  Total invested capital is Loan Money + Interest + Equity from owners (usually just cash).

Now... I primarily judge my deals on ROIC.  The minimum ROIC I go for is 15% (if I want less than 15% I just plunk my money in the stock market and forget the headaches of real estate).  For sure you want a deal where your ROIC is going to be higher than your cost of capital (i.e. the cost to borrow money from your lender).  If you have a hard money lender that offers 18% interest rates then you want to aim for deals with about 35%+ ROIC (18% to my lender and 35% - 18% = 17% to me).

Joshua Dorkin · Answer

Mike - we're going to be adding an online tool very shortly that will allow you to calculate cashflow, profit margins and much more for any property.  Stay tuned, and we'll be able to get you going online here.

Jason Barnett · Answer

Good profit leads to equity.  For residential / vacation homes / condos it might make sense to buy a home with negative cash flow in the hopes of selling later on appreciation.  (How did I forget about that in my first post?  Yikes!)  However, with multi-unit buildings or (especially) commercial properties then you only want deals with good positive cash flow.

When you get down to it there are 3 types of "income":
1. Cash flow (money in / out of pocket... easiest for most people to understand)
2. Taxable income (what you report to the IRS)
3. Net Income / Equity (your total gains / losses including non-cash gains and losses)

In almost all cases the 3 measures of income are going to be different.  In fact if you're doing things the "right way" then they should be different!  
You want Taxable Income (2) to be as low as possible.
You want Net Income (3) to be as high as possible.
You want Cash flow (1) to be as high as positive, but if you have a lot of money saved up to weather the tough times then it isn't strictly necessary.
Net Income (3) is the single most important measure.

Your cash flow is mostly important for knowing that you can pay your obligations as they come due.  If you have a negative cash flow deal then you're already paying for the "investment" every month... this doesn't make it a bad deal, but you should be paying close attention when someone tells you to buy on appreciation.  You can make big money this way, but always be on the lookout for external factors that drive appreciation...

biggerpo:  If I was going to figure out the total value of a deal then I would want to estimate several things:
- Cash flow (rents less expenses, not including mortgage(s))
- Appreciation in selling price of the property
- Tax benefits from owning the property (deduction of expenses against ordinary income... you need to know the marginal rate of taxation in order to do this...) in all reality you want to aim for losses on a taxable income perspective and this should reduce your total tax burden
- "Option" value: a sort of catch-all category for special items that can affect the value of the property.  For instance if there is talk of a Wal-Mart that wants to locate on your piece of property in 3 years then this "option" has some value.  A black-Scholes pricing model might fit in well here... it's not something that affects the average deal, but it would really help out land developers / rehabbers.

N/A N/A · Answer

Mike,

That is good advice that Juzajedi offered you, and he is right on the money with ways to analyze, however, there are worksheets.  Most investment books, I.E. "Investing for Dummies" has one, and so do most of the more technical books.  So just look them up at Borders or soemthing.  However, do remember this.....

Negative Cash Flow can serve a VERY useful purpose if you plan for it properly.  You can have an investment that gives negative cash flow daily, if you are in the property for the equity, not the cash flow.  IN that respect you need to plan carefully and know what you are getting into, and have some research on the market you are looking at to know if the ROI from the equity is enough or worth it to you to have a neg. cf property.  I know many investors that it seems only buy properties like that, because they are buying on equity, not cash flow.

Anyways, just a thought, hope it helps and if you want to kow more, let me know how I can help.

Chris

N/A N/A · Answer

Thanks for the responses.  Thought for a while no one was listening.  Anyway, looking forward to seeing what Biggerpo will come up with and I need to do some homework on ROIC numbers.  Also a good point on cash flow -vs- equity.

Thanks,
Mike

Rental Cashflow/Profit Worksheet?

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