In its most basic form, cash flow is cash coming into your pocket. Negative cash flow is cash going out of your pocket. But, let’s be real. The real question is, how do you determine the true cash flow of a property? The right answer can make you money by helping you see if this investment is right for you. An incorrect calculation can cost you big money. Here is a quick example to test your current investment analysis skills:
You bought a piece of commercial real estate as an investment for $900,000 last month. You put 30% down. Because this was a former gas station site, you had to do some studies totaling $8,000. Your loan had 1 point. You collect $5,400 per month in base rent. It’s a triple net lease. Taxes are $9,100 a year, insurance $2,000 per year and CAM’s $2,400 per year. Your additional operating expenses on the property are $300 per month. You set aside 5% for future capital improvements. Your loan payment is $4,622 (PI) per month.
What is your initial investment?
What is the cash flow before taxes on this investment property?
What is the cash on cash return for this investment property?
What was your cap rate on this purchase?
What price should you pay to get a 7% cap rate?
The answers respectively are $284,300; -$582; 0; 6.4%; $828,000.
How did you do? If you got something different, you need our Deal Analysis Basics course. This course lays out how items are categorized when analyzing a piece of real estate for the benefit of the investor. This course covers investment analysis for both a single family home investment property and a commercial property.
If terms like triple nets, base rent and CAM’s are foreign to you and/or you wonder what difference does the former use make, our Intro to Commercial Real Estate course is ideal for you. Check out our entire group of teleseminars at Smith Real Estate Services and sign up for a course or package today. An investment in you is an investment in building your wealth.
This entry was posted on Tuesday, January 30th, 2007 at 5:17 pm and is filed under Investment Real Estate. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
18 Responses to “Will You Make Money On This Deal?”-
jf.sellsius Says:
January 30th, 2007 at 6:58 pmGreat post. Hope you don’t mind us putting it on our blog. Due credit and link to you of course.
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Sheryl Says:
January 30th, 2007 at 8:08 pmThank you and please do! That is what blogging is all about…sharing great content.
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Deal or No Deal: Commercial Investment Quiz at sellsius° real estate blog Says:
January 30th, 2007 at 11:38 pm[…] via Smith Real Estate Services. (A commercial investment blog to watch) Listen to this podcast […]
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Doug Says:
January 31st, 2007 at 2:07 pmI need a few clarifications. Firstly, NNN Lease would mean that the tenant pays all expenses, including RE taxes and insurance, correct? Secondly, the capital reserves amount, 5% of what? GOI or NOI?
I like to think I’m pretty good at this stuff, but this problem seems a little scattered -
Commercial real estate investing quiz at PressReal.com Says:
February 1st, 2007 at 1:54 pm[…] Are you a savvy investor when it comes to things commercial? Find out how you stack up on this quiz. It’s short and sweet, and you’ll find it worth looking at. You can do the whole thing in less than 2 minutes. Bring your calculator and click here. […]
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Sheryl Says:
February 1st, 2007 at 4:08 pmIt’s great to see my quiz attracted your attention. I will have these periodically to test skills. Sign up to recieve my posts as soon as they come out.
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Brad Nix Says:
February 3rd, 2007 at 6:41 amGreat quiz to get the investors thinking. I will be posting it to my blog as Sellsius has done and giving you credit of course.
Keep up the good work!
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Dorky Dad Says:
February 7th, 2007 at 9:59 pmYour link to “Making Money with Negative Cash Flow” is dead.
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Sheryl Says:
February 8th, 2007 at 3:16 pmDorky Dad, I know. Sorry about that. We changed platforms and lost alot of my content so I have to start again. AAAAHHHH! Check back next week and I should have a new post up by then.
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Deal or No Deal: Commercial Investment Quiz - sellsius real estate blog - real estate, blogging, business, advertising, marketing, and technology Says:
March 7th, 2007 at 10:17 pm[…] via Smith Real Estate Services. (A commercial investment blog to watch) […]
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SmithREServices » A lease is a lease? Says:
April 5th, 2007 at 11:59 am[…] A couple a months ago, I posted Will You Make Money on This Deal? This article created a good deal of interest because it is common knowledge that the value of a commercial investment property is generally in the leases. This new post gives a little more detail on the answers from my previous post. Test your lease knowledge. […]
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