Originally posted on Rich Dad Education - Real Estate Blog:
One of the vital components of successful real estate investing is understanding how cash flow is calculated and what cash on cash return means. These concepts are critical to evaluating a property prior to purchase. The Net Operating Income (NOI) minus the monthly principal and interest on the loan (debt service) is called “cash flow.”
Let’s break that down to determine how we arrive at this number. (This is something we cover in great detail in the Rich Dad Education Elite Creative Financing course.)
To understand Cash Flow, we first need to define the following terms:
Gross Income – This is money received from the tenant(s) along with any other monthly income, such as money from vending machines, laundry fees, or parking fees.
Adjusted Gross Income – Gross income minus vacancy. Vacancy rates are obtained from the property management firm.
Capital Improvements – The changes or additions that increase the…
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