Florida Real Estate Broker ExaminationReal Estate Finance and InvestmentMedium
A Florida real estate investor is considering a property that generates $150,000 in annual gross income. Operating expenses, excluding debt service, are $45,000 per year. The investor plans to finance 70% of the $1,200,000 purchase price at an annual interest rate of 6% over 20 years. What is the investor's annual cash flow before taxes (CFBT)?
- A$70,800
- B$30,000
- C$63,600
- D$105,000
Show answer & explanationAnswer & explanation
Correct answer: C. $63,600
Cash Flow Before Taxes (CFBT) is calculated by subtracting operating expenses and debt service from the gross income. First, calculate the annual debt service, then subtract it along with operating expenses from the gross income.
Why the other options are wrong
- A. This is incorrect; it might result from a miscalculation of the debt service or its subtraction.
- B. This is incorrect; it significantly undervalues the cash flow by miscalculating or omitting key components.
- D. This represents the Net Operating Income (NOI) before debt service, not CFBT.
Cash Flow Before Taxes (CFBT)
Cash flow before taxes is the net operating income minus debt service, representing the money an investor has before paying income taxes.
- Represents distributable cash to the investor before taxes.
- Calculated as NOI minus debt service.
- Crucial for evaluating investment profitability.
Memory trick: Income, Expenses, Debt, then Taxes.