Cash Flow after Vacancy and Reserves

Cash Flow After Vacancy and Reserves (CFAVR) is a financial metric used in real estate investment analysis that represents the net cash flow generated by a property after accounting for vacancy losses and setting aside funds for future capital expenditures or unexpected costs (reserves). This metric provides a more conservative estimate of a property's income-generating potential by considering the impact of unoccupied units and the need for ongoing property maintenance and repairs.

To calculate Cash Flow After Vacancy and Reserves, you'll need to follow these steps:

Determine Gross Potential Income (GPI): This is the total rental income a property would generate if all units were fully occupied and paying the market rent.

GPI = (Number of Units × Monthly Market Rent) × 12

Calculate Vacancy Loss: Estimate the amount of rental income lost due to unoccupied units based on the property's vacancy rate.

Vacancy Loss = GPI × Vacancy Rate

Calculate Effective Gross Income (EGI): Subtract the Vacancy Loss from the GPI to determine the EGI.

EGI = GPI - Vacancy Loss

Determine Total Operating Expenses (TOE): Add up all the property's operating expenses, including property taxes, insurance, utilities, management fees, and routine maintenance costs.

Calculate Net Operating Income (NOI): Subtract the TOE from the EGI to determine the NOI.

NOI = EGI - TOE

Estimate Reserve Amount: Estimate the amount you'll need to set aside for future capital expenditures or unexpected costs. This may be a fixed amount or a percentage of the NOI.

Calculate Cash Flow After Vacancy and Reserves (CFAVR): Subtract the Reserve Amount from the NOI to determine the CFAVR.

CFAVR = NOI - Reserve Amount

CFAVR is a useful metric for investors because it provides a more conservative and realistic view of a property's cash flow, taking into account the impact of vacancies and the need for ongoing maintenance and capital improvements. Evaluating properties based on CFAVR can help investors make informed decisions about property acquisitions and management strategies.