Loan/Cash Flow Estimate

Here is a simple example investment and the formulas used to arrive at the loan amount and cash flow estimates.

Example Apartment Investment Property

  • 5-unit apartment building
  • Monthly rental income:  $1,800/unit
  • Building value/price:  $1,700,000
Gross Income (current annual) $108,000
Deduct 5% for vacancy – $5,400
Effective Gross Income (EGI) $102,600
Deduct proposed property taxes (1.10% to 1.30% of current value) – $21,250
Deduct proposed property insurance (0.00263 x current value) – $2,403
Deduct 16% of EGI (5% for management, 3% for maintenance, 3% for reserves, and 5% for miscellaneous expenses) – $16,416
Total Estimated Expenses $40,069
Net Annual Operating Income (NOI) $62,531

Based on the estimated amounts above, the NOI gets divided into the Lender’s minimum Debt Service Coverage Ratio (DSCR) of 1.20, which is the estimated Annual Mortgage Payment that the property can support.

Net Operating Income   ÷    Debt Service (annual loan payments)   =   DSCR
$62,531   ÷    1.2   =   $52,109.17  ($4,342/month)

In this case, $62,531 divided by  the 1.20 DSCR equals a $52,109.17 Annual Mortgage Payment that the property can support, or $4,342.43 per month.

If the Interest Rate is 3.5% with a 30-year amortization, the maximum loan amount the lender can lend against such a property is around $967,038.

Now, let’s calculate the cash flow.

Net Operating Income   –   Debt Service (annual loan payments)   =   Cash Flow
$62,531   –    $52,109   =   $10,422
Annually, this example property would have a cash flow of $10,422. Interested in investing in income property? Email us at hello@songsmortgage.com or give us a call at (408) 223-3330 and we can help you get started.
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