Mar 23rd

Cash Flow Investing Lessons (Thank's Facebook)

By Rick Melero, Commercial Investor, Real Estate Mentor, Member of HIS Board of Advisor

Today I decided that I wanted to ask a very basic question on Facebook about cash flow and get the perspective of others as a test. 

Read what they said...

Rick Melero $1.25 of income to $1.00 in expense. Anyone understand what these numbers mean?
Mandy Reed Barker
hmm...a $0.25 profit?


Alex Zokan
25% profit margain.


Jeff Bonner
And now for the smart alec answer: You need to charge more at your lemonade stand. Or find cheaper lemons. :)


Barbara Grassey
Pre and post tax spending. For every post tax dollar you spend, you need to earn anywhere from $1.20 - $1.50.


John Coryell
the cashflow a bank requires if you want a loan. that and some sort of liquidity from the investor


John Coryell
unless its commercial then the property itself is evaluated rather than the investors ability to back it financially
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Rick Melero
I love your answers :)

It is the simple approach to cash flow investing. Your income producing asset should always yield $.25 on every dollar you spend. In fact, even institutional lenders use a similar formula called "Debt Service Coverage Ratio" to help determine if the asset they are loaning on will cover the debt and yield a return to the investor.

And yes Jeff Bonner, you can use this formula with bigger numbers like my commercial buildings ;)

Rick Melero
Here is a live example of one of the (smaller) deals I am in the process of buying...

Based on yearly numbers:
Net Operating Income (NOI) $161,000 /
Debt Service (Mortgage) $110,000 =
Debt Service Coverage Ratio of 1.46
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It is that simple! If you want to invest in commercial real estate you will need to establish a basic criteria for the deals that you look to invest in. I hope that this very simple post will shed some light on the basics of cash flow.

Rick Melero
www.RealDealCommunity.com
www.HisRealestateNetwork.com/commercial
3 Comments
Nov 7th

What Does Debt-Service Coverage Ratio Mean?

By Rick Melero, Commercial Investor, Real Estate Mentor, Member of HIS Board of Advisor

Debt-Service Coverage Ratio:

The DSCR is a ratio used to analyze the amount of debt that can be supported by the cash flow generated from the property. Simply put, it is the net income generated by the property divided by the new annual commercial mortgage payment.

Every commercial loan underwriter uses this important factor to determine the approvability of a commercial mortgage requested.

Example:

$100,000 (NOI) / $65,000 (Debt Service) =

1.538 (DSCR)

So... a DSCR of .9 indicates a negative income.  This means that there is only enough income available after paying operating expenses to pay 90% of the annual debt service.  This scenario would not be approved by any lending institution.

Now if a property has a DSCR of 1.25, it is generating 1.25 times as much annual income as the annual debt service on the property.  This means that this property is generating 25%more income (NOI) than is required to cover the annual debt service.

Prudent investors always avoid being over leveraged with debt. This is why in most of our projects we raise more equity through private investors. By doing so, it enables us to create a margin of safety. We have also found that the more equity, the more competitive we can be in the market with our rental rates. More equity helps us to increase our occupancy rates when every other leveraged competitor can’t afford to match our rates.

 

Rick Melero

www.RealDealOrlando.com

 

 

2 Comments