How is cash flow calculated in relation to NOI?

Cash flow is defined as the amount of cash generated by an investment after all expenses, including debt service, have been paid. When relating cash flow to Net Operating Income (NOI), it is crucial to understand what NOI represents and how cash flow is derived from it.

NOI is calculated by taking a property's total rental income and subtracting operating expenses, excluding mortgage payments (debt service) and property taxes. This figure is vital because it provides an indication of the property's ability to generate income from operations alone.

To calculate cash flow from NOI, debt service must be excluded. Since cash flow focuses on the funds available to the owner after covering all operating expenses but before accounting for financing costs, it is derived by taking NOI and subtracting the mortgage payments. Thus, cash flow is directly related to NOI but distinctly does not include any financing costs or debt service considerations.

This approach allows investors to understand the actual operating performance of the asset, independent of how that asset is financed. By focusing on operating performance without the complexities introduced by debt service, investors can better assess the health and viability of their real estate investments.