Starting with the top level view, the operating income was $4,750, the property taxes were $585 and the home insurance was $239. This meant that the profit for the year was $3926. The operating income includes rents, property management fees, repairs and maintainance. The table of operating income looks something like this:
| Amount | Description |
| 750 | Rent |
| -80 | Steinborn Management |
| 750 | Rent |
| -80 | Steinborn Management |
| 750 | Rent |
| -80 | Steinborn Management |
| 750 | Rent |
| -80 | Steinborn Management |
| 750 | Rent |
| -80 | Steinborn Management |
| 150 | Tenant Deposit |
| -18 | Electricity |
| -864 | New Tenant Preparation |
| -67 | Cleaning Services |
| -19 | Electricity |
| -248 | Tenant Refund |
| -207 | Cleaning Services |
| -91 | Outdoor Cleaning |
| -106 | Water |
| -16 | Electricity |
| 120 | Tenant Move In |
| -12 | Steinborn Management |
| -59 | Water |
| -69 | Cooling Maintainance |
| -22 | Electricity |
| 225 | Tenant Move In |
| -24 | Steinborn Management |
| -17 | Electricity |
| -75 | Outdoor Cleaning |
| -77 | Back Door Repair |
| 1062 | Tenant Move In |
| -17 | Steinborn Management |
| -322 | Lease Fee |
| -535 | New Refrigerator |
| -74 | Water |
| 1377 | Tenant Move In |
| -218 | Steinborn Management |
| 750 | Rent |
| -80 | Steinborn Management |
| 750 | Rent |
| -80 | Steinborn Management |
| 750 | Rent |
| -80 | Steinborn Management |
The year started out with an intial investment amount of $25,500 in the property. The return was $3,926 which was 15%. There were principal payments of $1,260 and interest payments of $2,340. This means that the total return was $1,586 or 6.2%. The year ended with a final investment amount of $26,760 in the property which will be used to calculate next year's total return.
Notice that cash flow is determined based on the amount invested into the property and does not take into account appreciation. It also does not take into account depreciation savings from taxes. Both of these are added benefits. We can include appreciation if desired by adding the appreciated value to the return, principal payments, total return and final investment amount. We can also include the depreciation savings from taxes if desired by adding the savings to the return and total return.
For example, assume the home appreciated $2,000 and the depreciation savings were $580 (assuming a 25% tax bracket at depreciation of $2,323 reported on Schedule E). The return would be $5,346 or 20.9%. The principal payments would be $3,260. The total return would be $4,166 or 16.3%. The final investment amount would be $28,760.
The purpose of not using these figures to calculate cash flow is that we can make sure that our investment has staying power. However, including both appreciation and depreciation more accurately paints a picture of your investment. Also, notice that the total return as a percentage will tend to decrease each year, since more money will be tied up in this investment over time.
Shouldn't you calculate these numbers for your investment property? Wouldn't it be important to know how your investment is doing?
This post was reposted from http://finlit.biz/retirement-2/an-in-depth-look-into-real-estate-cash-flow/, originally written on February 8th, 2013.
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