Cash Flow Analysis – Real Estate Investing – Part 6 D
This is Part 6 D 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
Cash Flow Analysis – Real Estate Investing – Part 6 C
Part 6 is Cash Flow Analysis. I have broken this into several parts, Part D takes us to Net Spendable Income, what the investments means in your pocket every year. 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. We will be doing some things with these numbers and having the calculator will help you appreciate wise investment Strategies.
Go to Part 6A, 6B and 6C to see how we got these numbers. This calculation is a conservative estimate based on the Brentwood California Real Estate Market, but 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.
BEFORE TAX CASH FLOW: This amount is the amount of money that will be earned before Taxes. To see how we arrived at this number go to Part 6A. This number can fluctuate based on the property, management skills, and other factors. This example is a conservative estimate.
PLUS/LESS TAXES SAVED OR PAID: This amount is determined as shown in Part 6C. This number can easily change based on Tax Rates and Amount of Depreciation Allowed.
NET SPENDABLE INCOME: This is the amount of Net Spendable income you will achieve from the investment in a single year. Remember, the amount will fluctuate from year to year.
So you are not impressed with a $2,000.00 return on your investment. I want you to consider several things.
- If you invested $40,000.00 to obtain the house this is a 5% return on the cash invested.
- Over the long run you will make money on the appreciation of the property; in addition to the annual cash return on the initial investment.
- Finally, rents will be going up over time, while a fixed rate mortgage will stay the same; increasing the return on your investment.
Here is an example of what the income portion looks like if you reduce expenses to 20% and increase depreciation to 60%.
The annual return on investment has increased to almost 7%. There are many variables and they should all be considered when buying an investment property.
Watch this blog for further updates in the series.
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