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When evaluating cash flow projects, first get the NOI or Net Operating Income. Then calculate the Cap rate. To get the Cap rate divide the NOI by the Price. ie If NOI = $100,000 and you pay $1,000,000 for the project you have a Cap rate of $100,000/$1,000,000 = .10 or 10%. Compare that to your cost of capital. If your cost of capital is 8%, you can effectively yield a 2% difference. Or put another way if your Cap Rate is 10% with some risk, compare that to an alternative investment you can make to assess if it is worth it.

Your cap rate will vary based on 1 primary factor. If a project is riskier, it will typically have a higher cap rate such as a run down apartment complex. You will have to get paid a better return to compensate for the inevitable headaches associated. Such a property may sell for a 13% cap rate. Alternatively another property that is only a few years old in a great part of town with stable tenants may sell for a 7% cap rate. The lower the cap rate the more "expensive" it will be relative to cash flow. However you must look at risk as well as the cap rate.

Q: What are some important points to remember while estimating cash flow projects?

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