What is Cash Flow after Vacancy and Reserves?

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What is Cash Flow after Vacancy and Reserves?

Cashflow after Vacancy and Reserves refers to the final figure that represents all the net cash flow that a property will generate after all operating expenses and capital expenditures, including vacancy and reserves, are accounted for, but is before debt. It essentially is the difference between all the income the property generates and all the operating expenses and capital expenditures. In our models, the Cash Flow after Vacancy and Reserves is calculated by subtracting the project management fee and the capital expenditure reserves from the net operating income. 

This figure is vital for property owners and investors alike to know, as it is perhaps the most accurate estimation of the true net profit of a specific property. It accounts for every stream of revenue and all expenses except debt, so it gives real estate professionals assurance that a certain real estate asset is worth pursuing.

Cash Flow after Vacancy and Reserves vs. NOI

The net operating income, also referred to as NOI, is a similar figure to the Cash Flow after Vacancy and Reserves, as they both provide estimations of the earning capabilities of a given property. However, the Cash Flow after Vacancy and Reserves figure is a slightly more accurate statistic as it accounts for certain expenses not included in the NOI.

At Top Shelf Models, the Net Operating Income is used directly in the calculation to find the Cashflow after Vacancy and Reserves, so the two figures have a direct relationship with one another – if an altered assumption affects the NOI, the Cash Flow after Vacancy and Reserves will follow. When calculating the exit value of a project, we use a forward or trailing NOI value divided by a specified cap rate. Capital expenditures are not classified as operating expenses, so it is important to not group these into the NOI value as they can then provide an inaccurate exit value.

Cash Flow after Vacancy and Reserves in Real Estate

At Top Shelf Models, Cash Flow after Vacancy and Reserves is an integral piece of our models. For our clients, one of the first places to look after entering all requisite assumptions is the Cash Flow after Vacancy and Reserves section. This is displayed on either the Investor Summary, Model Outputs, or the Monthly/Annual Cashflow tab. For any analysis of a project, whether it be a development or an acquisition of a property, the Cash Flow after Vacancy metric is a good place to start, as it is a conglomeration of all of the revenues and expenses netted together. In essence, it is a single number that can be used as a baseline to understand all the other assumptions, costs, and sources of income without delving too deeply into the models.

Conclusion

While there are many important statistics that help real estate professionals assess how much net profit a property can generate, Cash Flow after Vacancy and Reserves is arguably the most important as it is the most accurate, all-inclusive metric of the earning capability of a given property. It is an excellent baseline statistic to read before going into a deep analysis of the specific revenues and expenses of a property, as it nets all of those values into one clean value.

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About the Author

Brittany Martin is TSM’s Vice President who has developed real estate financial models for an extensive range of property types. She specializes in land, hotel, and storage models. Please reach out to her if you have any questions on Cash Flow after Vacancy and Reserves or if she can help you with your modeling needs.