How to Calculate Pre-Tax Cash Flow Benefits

by Ryan Menezes

Pre-tax cash flow benefits form one of several metrics for evaluating a property investment. The metric, also known as "before-tax cash flow" (BTCF) or "equity dividend," describes the income you receive from a property before factoring in income tax or tax depreciation. This value is less than your net operating income because it factors in your debt service, which includes the payments and interest for your loan on the property.

Step 1

Subtract the value of your property's vacancy and collection loses from its potential annual rental income (PARI). For example, if you have a PARI of $30,000 but experience $2,000 in vacancy and collection losses, subtract $2,000 from $30,000, giving $28,000. This value is your effective gross income (EGI).

Step 2

Subtract your operating expenses from your EGI. For example, if your operating expenses cost you $5,000, subtract $5,000 from $28,000, giving $23,000. This is your annual net operating income (NOI).

Step 3

Subtract the value of your debt service from your NOI. For example, if you make 12 payments of $1,400 over the course of the year, that adds up to a debt service of $16,800. $23,000 is $6,200 more than $16,800. Your pre-tax cash flow benefits therefore add up to $16,800.

References (2)

  • Questions and Answers to Help You Pass the Real Estate Appraisal Exams; Jeffrey D. Fisher and Dennis S. Tosh
  • Investment Analysis for Appraisers; Jeffrey D. Fisher and Robert S. Martin

Resources (2)

  • Project Economics and Decision Analysis; M. A. Mian
  • Real Estate Math: Explanations, Problems, Solutions; George Gaines, et al.