Investor Annual Operation Return

In 2019, commercial property owners (including multifamily product type investors) should look carefully at the financial status of their properties. This would start by engaging an experienced commercial real estate broker to properly valuate the investment.

Once the value has been determined, the pre-tax cash flow must be established by using the standard formula of calculation. Next, the taxes payable is obtained by taking the Gross Schedule Income and deducting the annual loan interest, expenses and depreciation to come up with the taxable loss. The investor’s current tax bracket percentage is then calculated and deducted from the taxable loss amount to determine the tax payable.

The tax payable amount is deducted from pre-tax cash flow. The sum is added to the annual principal reduction which is obtained from the investor’s mortgage statement, and the final sum would be established as the total investor return after taxes.

If the investor is considering placing the property on the market, another important aspect of the property financials is Rate of Return on Net Equity. The commercial broker could determine this by subtracting their current loan balance from any new loan a prospective purchaser might have after their down-payment (possibly 40% or 50% of the property value). The net loan funds are added to the buyer’s cash down payment to get the total cash generated from a sales scenario.

After expenses are determined, the sum is deducted from the cash generated from sell to determine investor’s net proceeds. Then the pre-tax and after-tax cash flow, as well as the principal reduction, and the total after tax return amounts are all divided by the total cash generated from sale to come up with the percentages for each category as it relates to the net equity or investor’s net proceeds.