PHA
Payment Standard
This is an important PHA reference used in calculating voucher assistance, but it is not automatically the rent the property will receive.
Section 8 • Lesson 7
Cash flow determines what the property is worth to you.
The seller has an asking price. You need an investment price.
Start with the rent the property can realistically produce, subtract every operating expense, protect the monthly cash flow you require, and let the remaining income determine how much debt the property can support.
Rent → Expenses → NOI → Debt Service → Cash Flow → Maximum Price
Step 1
Start with a realistic monthly rent number.
Do not automatically treat the published PHA payment standard as guaranteed rent to the landlord.
RENT
Rent to Owner
This is the contract rent paid to the landlord from the combination of housing assistance and tenant rent responsibility.
HAP
HAP + Tenant Portion
The PHA generally pays its housing assistance portion directly to the landlord, with the tenant responsible for the applicable tenant portion.
Underwrite conservatively.
Before acquisition,
verify the applicable PHA information,
utility responsibilities,
rent-reasonableness requirements
and realistic rent-to-owner assumption.
Income Side of the Property
Know exactly what rent number you are underwriting.
Rent to Owner
HAP + Tenant Portion
The combined landlord rent stream under the tenancy.
Investor Starting Point
Monthly Rent to Owner
This becomes the gross rent input in your acquisition model.
The payment source is not the same thing as the investment economics.
Whether the rent comes from the PHA,
the tenant,
or a combination of both,
you still need to analyze
all of the property's expenses.
Step 2
Back out the operating expenses.
Rent is not profit. Every dollar that leaves the property must be accounted for.
VAC
Vacancy / Collection
Build in an allowance for downtime, transition or collection issues.
MGT
Management
Include the cost of management even if you initially plan to manage the property yourself.
FIX
Repairs
Set aside money for ordinary maintenance and repair needs.
CAP
CapEx
Roofs, HVAC, appliances and other larger replacements eventually occur.
TAX
Property Taxes
Use the actual or reasonably projected annual property tax expense.
INS
Insurance
Use realistic landlord or investment-property insurance costs.
UTIL
Owner-Paid Utilities
Include utilities the landlord is responsible for paying.
ETC
Other Costs
HOA, lawn care, administration, pest control and other recurring expenses.
Step 3
Calculate Net Operating Income.
NOI tells you what the property produces before mortgage debt service.
NOI Formula
Gross Rent − Operating Expenses = NOI
For the SSBS calculator,
we calculate this monthly
and also show the annualized figure.
Mortgage payments are not included in NOI.
NOI measures the property's operating economics
before financing.
Simple Example
See how quickly gross rent becomes real cash flow.
| Item | Monthly Amount | Calculation |
|---|---|---|
| Gross Rent | $2,100 | Starting income |
| Vacancy / Collection | $105 | 5% of rent |
| Management | $168 | 8% of rent |
| Repairs Reserve | $105 | 5% of rent |
| CapEx Reserve | $105 | 5% of rent |
| Taxes | $150 | $1,800 ÷ 12 |
| Insurance | $125 | $1,500 ÷ 12 |
| Lawn / Misc. | $65 | Example owner costs |
| Total Operating Expenses | $823 | Before mortgage payment |
| Monthly NOI | $1,277 | $2,100 − $823 |
These numbers are examples only.
Your actual taxes,
insurance,
repairs,
management,
utilities
and other expenses may be materially different.
Step 4
Now subtract the mortgage payment.
Investor Cash Flow
Monthly NOI − Monthly Debt Service = Monthly Cash Flow
Debt service is the principal-and-interest payment
generated by your financing structure.
This is where purchase price matters.
The higher the purchase price,
the larger the financing requirement may be.
The larger the debt service,
the less cash flow remains.
Step 5
Decide what cash flow you require before you negotiate.
Your Target
Decide the minimum monthly cash flow you want the property to produce under your assumptions.
Protect the Target
Do not simply accept whatever cash flow is left after agreeing to the seller's price.
Work Backward
Subtract your target cash flow from NOI to determine the maximum debt service the property can support.
Reverse-Engineering Step
NOI − Target Cash Flow = Maximum Debt Service
This is the bridge between property operations
and acquisition price.
Apply the Lesson
Use the Reverse-Engineering Calculator.
This is where the cash-flow lesson becomes an acquisition decision.
Enter the expected rent, operating expenses, financing terms, target cash flow, rehabilitation costs, closing costs, holding costs and contingency reserve.
The calculator works backward and gives you a modeled Maximum Offer Price.
The Calculator Works Backward
Monthly Rent
Start with income.
− Operating Expenses
Find NOI.
− Target Cash Flow
Find maximum debt service.
→ Maximum Loan
Use interest rate and amortization.
→ Maximum Purchase Price
Apply the financing structure.
− Rehab / Closing / Holding
Back out acquisition costs.
Maximum Offer Price
Why Reverse-Engineer the Deal?
Because asking price is not investment value.
Seller
Wants the highest price
the market will pay.
Lender
Determines how much
it is willing to finance
and under what terms.
Property
Produces a limited amount
of income
and has real operating costs.
Investor
Must decide whether
the remaining cash flow
justifies the investment.
The property's economics should determine your offer.
Do not start with the seller's price
and manipulate assumptions
until the deal appears profitable.
Before You Rely on the Numbers
Verify the assumptions.
Rent
Verify the PHA, payment-standard information, property bedroom count, rent reasonableness and realistic rent to owner.
Utilities
Determine which utilities the landlord pays and which the tenant pays.
Taxes
Verify current taxes and consider whether acquisition may change the tax amount.
Insurance
Obtain an actual landlord or investment-property quote when possible.
Rehab
Inspect the property and estimate both immediate repairs and make-ready costs.
Financing
Verify rate, amortization, loan-to-value, lender fees and required reserves.
Street Smart Decision Rule
There are only a few ways to fix a bad deal.
Lower the Price
Negotiate an acquisition price
supported by the income.
Improve the Terms
Better financing
can reduce debt service.
Improve the Economics
Reduce legitimate expenses
or improve allowable rent
where the market and program support it.
Walk Away
A property is not a good deal
merely because it is available.
Never be afraid of losing a deal that does not make money.
The objective is not to own a property.
The objective is to own a property
whose economics support your investment strategy.
Section 8 Curriculum
Lesson 7 complete.
You now understand how rent becomes NOI, how NOI becomes debt-service capacity, and how debt-service capacity can be used to reverse-engineer the acquisition price.
Previous Lesson
Review how to identify potential properties that fit the investment model.
Use the Calculator
Put the cash-flow methodology into practice and calculate a maximum offer price.
Next Lesson
Learn how financing terms affect acquisition price and monthly cash flow.
Work the Numbers
Use the Section 8 Workbook with the calculator.
Record the property's assumptions, rent research, expenses, financing and acquisition numbers before making an investment decision.
- Monthly rent assumption
- Property expenses
- Rehabilitation budget
- Financing assumptions
- Cash-flow target
- Maximum offer price
Ask Luna
Need help understanding the numbers?
Luna can help point you toward the appropriate SSBS lesson and help organize your property-analysis questions.
Lesson Seven Complete
The deal starts with the income — not the asking price.
Find the rent. Subtract the expenses. Calculate NOI. Protect your cash-flow target. Determine debt-service capacity. Back into the financing. Then determine your price.
Buy based on cash flow — not emotion.
The seller tells you what they want.
The numbers tell you what you can afford to pay.