Investment and property management math: return…

Follow the income waterfall

Potential gross rent assumes full occupancy and collection. Four apartments renting for $1,000 monthly produce 4 × $1,000 × 12 = $48,000 annually. A 5% vacancy and collection allowance is $48,000 × 0.05 = $2,400. Remaining rent is $48,000 − $2,400 = $45,600. Add other income to obtain effective gross income. With no other income and $18,000 in operating expenses, net operating income (NOI) is $45,600 − $18,000 = $27,600.

An income staircase begins with forty-eight thousand dollars of annual potential rent. Subtract twenty-four hundred dollars of vacancy and collection loss and add zero other income to reach forty-five thousand six hundred dollars of effective income. Subtract eighteen thousand dollars of operating expenses to reach twenty-seven thousand six hundred dollars of net operating income. Subtract fifteen thousand six hundred dollars of debt service to reach twelve thousand dollars of before-tax cash flow, assuming no other cash adjustments. — Separate property operations from financing to measure income and cash flow.

Debt service and income-tax depreciation are not operating expenses in NOI. Debt service includes loan principal and interest. Assuming no other cash adjustments, $15,600 annual debt service leaves $27,600 − $15,600 = $12,000 before-tax cash flow.

Choose the right denominator

Cash-on-cash return divides annual before-tax cash flow by initial cash invested: $12,000 ÷ $100,000 = 0.12 = 12%. Capitalization rate divides annual NOI by property value or price: $27,600 ÷ $400,000 = 0.069 = 6.9%. Match the return measure to the question.

Track value changes

Appreciation is an increase in value. Starting at $200,000, a 5% increase is $200,000 × 0.05 = $10,000, giving $210,000. A second 5% increase gives $210,000 × 1.05 = $220,500. Compound growth uses the updated value each period. For a decline, multiply by one minus the decline rate.

Separate depreciation meanings

Depreciation may describe loss in property value or an income-tax cost-recovery deduction. A simplified straight-line exercise divides the stated depreciable amount by the stated useful life, allowing for any stated residual value. Land is not depreciable for income-tax purposes. A deduction is not itself a cash outflow or evidence of declining market value. The supplied sources do not establish tax recovery periods; use stated exercise assumptions rather than inventing statutory periods.

Read rental terms

For rent quoted annually per square foot, multiply the rate by area, then divide by 12 for monthly rent. Compute management fees on the agreement's specified base, such as collected rents. Tax results require separate analysis; investment performance and taxable gain are not interchangeable.

Investment and property management math: return, appreciation, depreciation, and rents