Understanding Cash Throw-Off
Cash throw-off is a term commonly used in real estate investment to describe the actual cash a property generates, excluding non-cash expenses like depreciation and amortization. It’s essential for evaluating the profitability and risk associated with a property investment.
Calculation
The formula for cash throw-off (or cash flow) is straightforward:
\[ \text{Cash Throw-Off} = \text{Gross Rental Income} - \text{Operating Expenses} - \text{Debt Service} \]
Where:
- Gross Rental Income: The total income generated from the property before any expenses are deducted.
- Operating Expenses: These include property taxes, maintenance costs, management fees, insurance, and utilities.
- Debt Service: The total of all loan payments including interest.
Examples
- Residential Rental Property: A duplex generates $4,000 per month in rental income. Monthly operating expenses amount to $1,200, and the mortgage payment (debt service) is $1,500. Thus, the monthly cash throw-off is:
\[ $4,000 - $1,200 - $1,500 = $1,300 \]
- Commercial Building: A commercial office building generates $30,000 per month in rental income. Monthly operating expenses are $10,000, and the monthly debt service is $12,000. The monthly cash throw-off is:
\[ $30,000 - $10,000 - $12,000 = $8,000 \]
Frequently Asked Questions (FAQs)
Q: How does cash throw-off differ from net operating income (NOI)?
A: Net Operating Income (NOI) is a measure of a property’s revenue less operating expenses, but it doesn’t account for debt service. Cash throw-off includes debt service, offering a clearer picture of the property’s actual cash earnings.
Q: Why is cash throw-off important for investors?
A: Cash throw-off gives investors insight into the actual cash income they can expect after all expenses are paid, making it easier to gauge the financial viability and return on investment (ROI) of a property.
Q: Is cash throw-off the same as cash flow?
A: Yes, cash throw-off and cash flow are often used interchangeably to describe the net amount of cash generated by a property after all relevant expenses and debt payments.
Q: Can a property have a positive NOI but negative cash throw-off?
A: Yes, if the debt service on a property is higher than the NOI generated, the property can have a negative cash throw-off, indicating that it does not generate positive cash income.
Related Terms with Definitions
- Gross Rental Income: The total income generated from renting out a property before any expenses are deducted.
- Operating Expenses: Costs required to operate and maintain a rental property, such as repairs, property management, and insurance.
- Debt Service: The cash required to cover the repayment of interest and principal on a debt for a particular period.
- Net Operating Income (NOI): A calculation used to analyze the profitability of income-generating real estate investments, excluding financing costs and taxes.
- Cap Rate (Capitalization Rate): The rate of return on a real estate investment property based on the expected income that the property will generate.
Online Resources
- Investopedia - Real Estate Financial Terms
- Nolo - Real Estate Investment: Cash Flow Analysis
- BiggerPockets - Understanding Cash Flow in Real Estate
References
- Fisher, Jeff. “Real Estate Finance and Investments.” 15th edition. McGraw-Hill Education, 2016.
- Peiser, Richard and Frej, Anne. “Professional Real Estate Development.” 2nd edition. Urban Land Institute, 2022.
- Geltner, David, and Miller, Norman G. “Commercial Real Estate Analysis and Investments.” 3rd edition. Cengage Learning, 2013.
Suggested Books for Further Studies
- “The Millionaire Real Estate Investor” by Gary Keller
- “Investing in Apartment Buildings” by Matthew A. Martinez
- “Real Estate Investing for Dummies” by Eric Tyson and Robert S. Griswold
