Build the waterfall
Gross potential rent → minus vacancy, concessions and bad debt → plus other income = effective gross income → minus operating expenses = NOI → minus debt service = cash flow before tax → minus capital reserves = distributable cash.
Key ratios
Cash-on-cash return (annual cash flow ÷ cash invested), debt service coverage ratio (NOI ÷ debt service), and break-even occupancy (expenses + debt service ÷ gross potential income).
Stress test
Model higher vacancy, a tax reassessment, an insurance increase and a major repair. A good deal still cash-flows under a realistic bad year.
This guide is general information, not legal, tax or financial advice. Talk to your own advisors about your situation.
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