I was specifically commenting on your statement regarding cashflow. In order to determine your cashflow you must include your debt service. There is no way around it. Yeah, ofcourse if you pay all cash you obviously don’t have debt service. But that goes without saying. The majority of investors will almost always leverage their properties.
I would not subtract the Net Income by the actual mortgage. To me that doesn’t not represent a true property evaluation. The evaluation of the property is what we are trying to do here.
If you wanted to figure out your cashflow you would. I’m not understanding your position. The bottom line is what we are trying to do here in my opinion. Without including your debt service, how will you know your CF?
Cap rates and other ratios are used by those who don’t understand what matters.
Cap rates will give you a quick glimpse of the deal. If it a true cap rate then you know the NOI, are you saying NOI is not important?
What matters to me is my Cash on Cash Return. I want to know how much return I am making on my money.
What matters is whether or not the money the property produces is greater then the costs of the property. Money In Vs. Money Out.
Wouldn’t the cost of the property include your debt service (money going out?)
Take this for an example:
A 100 unit apartment bldg has a NOI of $180K. Purchase price $2M. true 9% cap rate. Not a bad deal at all. income is obviously higher then expenses. 20k per unit!!! Sweet deal!
However, the property comes with an assumable loan $1.8M @ 8.5% 25 yr am. it requires you to put down 200k plus closing costs etc = $230k total out of pocket.
Now it may look like a sweet deal by evaluating and verifying the income and expenses but is it such a good deal with the debt service???
1.8 M @ 8.5% 25 yr am = 173,928/yr debt service.
your cashflow is a whopping $6072/yr (NOI - Debt service)
And your Cash on Cash return is 2.64% (6072/ your DP 230k)…i can do better then that in a money market savings account.
I think you get my point. Your debt service is a very crucial part of your analysis.