First off, shoutout to Paul Thompson. As always, he delivered a great presentation at the “Commercial Cash Flow Blue Print“! For everyone I met today in Alabama, here is a simple breakdown of what Paul went over today. A quick “back-of-the-napkin” underwriting method with each step labeled. SECTION 1: CORE FORMULA (NOI) NOI = Units × Monthly Rent × (1 − Vacancy) × (1 − Expense Ratio) × 12 months ***** ******* SECTION 2: HOW THE PERCENTAGES WORK Vacancy = 5% 1 − 0.05 = 0.95 Meaning: You keep 95% of the income after vacancy Expense Ratio = 45% 1 − 0.45 = 0.55 Meaning: You keep 55% of the income after expenses ***** ******* SECTION 3: EXAMPLE 1 (8 UNITS) Given: 8 Units $1,200 Monthly Rent $1,000,000 Purchase Price $60,000 Annual Debt $200,000 Cash Invested Step 1: Gross Monthly Income 8 units × $1,200 rent = $9,600 monthly income Step 2: Gross Annual Income $9,600 monthly × 12 months = $115,200 annual income Step 3: After Vacancy $115,200 × 0.95 (1 − 0.05 vacancy) = $109,440 Step 4: NOI $109,440 × 0.55 (1 − 0.45 expenses) = $60,192 NOI Step 5: Cash Flow $60,192 NOI − $60,000 debt = $192 annual cash flow Step 6: Cap Rate $60,192 NOI ÷ $1,000,000 price = 6.0% cap rate Step 7: Cash on Cash $192 cash flow ÷ $200,000 cash = 0.1% return Conclusion: Break-even deal. This does not meet our criteria. As deal finders/wholesalers, we are typically targeting at least an 8% cap. ***** ****** SECTION 4: EXAMPLE 2 (12 UNITS) Given: 12 Units $1,100 Monthly Rent $1,200,000 Purchase Price $70,000 Annual Debt $240,000 Cash Invested Step 1: Gross Monthly Income 12 units × $1,100 rent = $13,200 monthly income Step 2: Gross Annual Income $13,200 × 12 months = $158,400 annual income Step 3: After Vacancy $158,400 × 0.95 (1 − 0.05 vacancy) = $150,480 Step 4: NOI $150,480 × 0.55 (1 − 0.45 expenses) = $82,764 NOI Step 5: Cash Flow $82,764 NOI − $70,000 debt = $12,764 annual cash flow Step 6: Cap Rate $82,764 NOI ÷ $1,200,000 price = 6.9% cap rate