Cash Flow Analysis – Real Estate Investing – Part 6 C
This is Part 6 C of my Real Estate Investing Series. You can view the first 5 Parts here:
Are you planning for your Future? Real Estate Investing – Part 1
Starting at Home! Real Estate Investing – Part 2
Maintain Your Leverage! Real Estate Investing – Part 3
Picking Your Investment Property – Real Estate Investing – Part 4
Location * Location * Location – Real Estate Investing – Part 5
Cash Flow Analysis – Real Estate Investing – Part 6 A
Cash Flow Analysis – Real Estate Investing – Part 6 B
Part 6 is Cash Flow Analysis. I have broken this into several parts, Part C takes us to Tax Benefit Analysis. You may go to my web site and get a Free Cash Flow Calculator and down load a copy of the live example of this example at the same time.
This assumes a new home purchased at $200,000.00 with 20% done and a 30 year loan at 6%. I am assuming a monthly rent of $1,800.00. Go to Part 6A and 6B to see how we got these numbers. This calculation is a conservative estimate based on the Brentwood California Real Estate Market, but I with hard work I think an investor could achieve even better results. Play around with the figures on the calculator to see how the investment return could change with hard work and wise investing.
NET OPERATING INCOME: This is the dollar amount of net income that we worked out in Part 6A. This number can vary widely on one property year to year, but in general should be expected to increase year to year as rents go up. Hard work and good management could also reduce expected expenses.
LESS INTEREST PAID ON LOAN: This is not the total money spent servicing the loan, just the interest on the loan. Unless it is an interest only loan the amount of interest will decline every year as more and more of the principle is paid off. This assumes the interest rate is fixed too.
LESS DEPRECIATION: This is the Depreciation obtained in Part 6B. The amount of depreciation you can obtain on a piece of real property will vary greatly based on the characteristics of the property that go beyond simple cost. Try adjusting the depreciable amount in a realistic direction on the calculator.
NET TAXABLE INCOME/LOSS: This is how much money you will have to pay taxes on, or is deductible on your taxes as a loss. Losses due to depreciation are "Passive Losses" and there is some restrictions on Passive Losses. You should check with your accountant.
TAX BRACKET: You should check with your accountant to determine what your TOP INCOME Bracket is you will pay on or take losses on for combined Federal & State Income Taxes. The indication are we can expect Income Taxes to go up, making real estate an even better investment.
TAXES SAVED OR PAID: A positive number is how much additional taxes you will pay based on the income you derive from the property. A negative number is how much loss you can take off of you tax liability. Remember there are some restrictions on Passive Losses.
Depreciation is a powerful tool in Real Estate Investing. Remember the Losses taken above are Paper Loses and may actual enhance your tax flow. When you go to invest you want to find a property that offers as many advantages as possible for you the investor. Try changing some of the flexible numbers a little on the calculator and see how it effects your profits.
Watch this blog for further updates in the series.
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