Question

David owned a building worth $1,500,000. He has debt service of $7,500 per month, of which 90% is interest. He has a potential rental income of $900,000 and a vacancy rate of 7%. His operating expenses are 40% of the Effective Gross income. In addition to his operating expenses, he has reserves of $30,000, depreciation of $50,000 and an income tax bracket of 28%.

What will David's after-tax cash flow on this building be?

Answer 1

$378,374

Step-by-step explanation:

Vacancy rate is 7% of gross rental income.

Operating expenses are 40% of effective gross income, which gross rental income less vacancy allowance.

Depreciation, reserve and interest expenses are deducted to arrive at tax charge, these are added back in net income after tax and total debt service is deducted to arrive at after-tax cash flow on the building. Calculation is performed below:

Rental Income 900,000

Less: Vacancy Loss (900,000*7%) (63,000)

Effective Gross Income 837,000

Less: Operating expense (837,000*40%) (334,800)

Less: Reserve (30,000)

Less: Depreciation (50,000)

Interest (7,500*90%) (6,750)

Net Income before tax 415,450

Tax @ 28% (116,326)

Net Income 299,124

Add Back:

Depreciation 50,000

Reserve 30,000

Interest 6,750

Less: Debt service (7,500)

After tax cash flow on the building 378,374