Before tax cash flow (BTCF) is an important analysis metric for commercial real estate investment and represents the cash flow that the investor gets after all operating expenses and the mortgage payments due for any mortgage loan, which was used in financing the acquisition of a property, are deducted from the net operating income.
BTCF is used for the estimation actually of the return on equity (ROE), that is the income return that corresponds to the equity invested in the property. The annual BTCF can be calculated by subtracting from the annual net operating income (NOI) of the property the annual mortgage payments or debt service, as loan payments are more commonly referred to in real estate investment terminology.
More specifically, the formula for estimating the BTCF is the following:
BTCF = Net Operating Income (NOI) – Debt Service
Where:
NOI = Effective Gross Income (EGI) - Operating Expenses
EGI = Gross Rental Income + Other Income + Recoveries – Vacancy and Collection Losses
Example of Before Tax Cash Flow Calculation
In order to demonstrate the application of the before tax cash flow formula consider the case of an apartment building with 6 units, bought for $290,7000 80% of which was financed with a mortgage loan with a fixed interest rate of 7% and term for full amortization of the loan 20 years or 240 months. See below the calculations for the estimation of the before-tax cash flow.
Number of Units: 6
Property Value: $290,700.00
Average Monthly Rent/Unit: $400.00
Potential Annual Rental Income (PARI): $28,800.00
Other Income (Annual): $0.00
Recoveries: $0.00
Vacancy and Collection Losses (% of PARI): 5.0%
Vacancy and Collection Losses Amount: $1,440.00
Effective Gross Income (EGI): $27,360.00
Operating Expenses: $4,104.00
Annual Net Operating Income: $23,256.00
Loan-to-Value Ratio: 80%
Fixed Interest Rate: 7%
Loan Term in Months: 240
Annual Debt Service: $21,636.42
BEFORE TAX CASH FLOW: $1,619.58
You can get FOR FREE the spreadsheet with the formulas for the above calculations, where you can enter the numbers that apply to your case (apartment building) and have the BTCF calculated automatically. If you place an order for the e-book Real Estate Investment Mathematics we will send you several bonuses including the Net Operating Income Spreadsheet that has the formulas for calculating NOI and BTCF once you enter the numbers for the items above.
Related Posts
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Discounted Cash Flow Model
Annual Return Calculation
Overall Capitalization Rate
Equity Dividend Rate
Equity Capitalization Rate
Real Estate Return Measures
Return from Before Tax Cash Flow to Property Investment Analysis
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