The following numbers are stated for an apartment complex at Loopnet. Asking price is $2,000,000.
Can anyone please help me understand the pre-tax cash flow figure and also explain what a Reimbursement is?
Scheduled Gross Income: $290,740
Effective Gross Income: $273,295
Other Expenses: $27,504
Total Expenses: $78,873
Net Operating Income: $194,400
Debt Service: $155,544
Pre-Tax Cash Flow: $103,295
Debt Type: Existing
Interest Rate: 7.10%
Amortized Over: 30
Due In: 9
Reimbursement is probably where the utilities are on a single meter and the tenants pay the owner back their % of the bill. Could be something else. Best to ask the Broker.
Most investments in commercial deals are compared using the NOI which is the income after all expenses and before the debt service. The NOI is divided by the asking price giving you the capitalization rate or cap rate for short. In your example the NOI of $194K divided by $2M gives you a 9.7% cap rate. If you paid cash of $2M you would be earning 9.7% on your money. This is a pretty good cap rate for a class A or B property and just OK for a lesser quality building. Deals like Class A retailers and shopping centers with national tenants generally sell at a 5% cap rate.
The pre tax cash flow is just after paying the debt service. Keep in mind that principal reduction payments are not tax deductible when figuring your after tax cash flow if you want to compare tax free investments like tax free bonds etc.
Leverage works here where you are borrowing at 7.1% and earning 9.7% on the overall investment.
Hope this helps.
Nice one Ted. That helped tremendously.