Holicent
VIP Contributor
Adjusted funds from operations, or AFFO, is a metric that real estate investors use to evaluate the amount of cash flow that a property generates. It's calculated by adding back non-cash expenses such as depreciation and amortization to net operating income (NOI). If you're not familiar with NOI, this is an income statement figure that real estate investors use to determine how much money a property brings in after all expenses have been paid.
For example, if you buy a building for $1 million and it generates an annual net income of $50,000, your NOI would be $50,000. However, if you paid $30,000 in interest during the year on your mortgage and spent $5,000 on maintenance repairs for the building, your NOI would be $15,000 ($50,000 – $30,000 – $5,000).
AFFO is a more accurate representation of a property's cash flow than net income because it accounts for depreciation and amortization expenses, which are non-cash charges.
For example, if you buy a building for $1 million and it generates an annual net income of $50,000, your NOI would be $50,000. However, if you paid $30,000 in interest during the year on your mortgage and spent $5,000 on maintenance repairs for the building, your NOI would be $15,000 ($50,000 – $30,000 – $5,000).
AFFO is a more accurate representation of a property's cash flow than net income because it accounts for depreciation and amortization expenses, which are non-cash charges.
