An In Depth Look Into Real Estate Cash Flow

This article talks about cash flow for a real estate property.  Dealing with actual numbers may open your eyes to how you should look at your real estate property.  It also may help to avoid a bad investment.  This covers an actual investment property for 2012 income and expenses.

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:

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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.

How Do You Calculate the Rate of Return for a Second Year Rental Property?

This is a follow on from an earlier post. This time we will start with the assumption that there is $58,000 put into the home, $5,000 from closing costs, $50,000 from a down payment and $3,000 equity built in the first year.

We will also assume the same rent price of $1,800 of which $1,200 goes to the mortgage.  We will also assume taxes and insurance remained the same, totalling $2,150.  Finally, we will assume that the property had a four month vacancy and a maintenance of $600 between tenants.  Now what is the rate of return?

For this year, there was $4,800 income and $2,750 of expenses leaving a profit of $2,050.  Assuming the equity in the second year built by $3,100, this leaves a profit of $5,150.  This is a return of 8.87% on the $58,000 put into the home.

Notice that the calculation used $58,000 since there was the option to invest this money somewhere else.  For instance, if another investment could be used to take $43,000, which might be after paying $15,000 to sell the home, and make more than $5,150 it would have performed better for the second year.

Now, the question remains.  You made 12% the first year and 8.87% the second year.  What is the overall rate of return for the two year period?  Any takers?

Read more about real estate at www.retailinvestor.org.

This post was reposted from http://finlit.biz/retirement-2/how-do-you-calculate-the-rate-of-return-for-a-second-year-rental-property/, originally written on January 30th, 2013.

How Do You Calculate a Rate of Return for a Rental Property?

Suppose you purchased a rental property for $200,000 and spent $5,000 in fees associated with the purchase in January of 2012.  Furthermore, suppose you put $50,000 as a down payment.

If the property rented for $1,800 per month and the mortgage was $1,200, how do you calculate the rate of return?

On top of that, lets say that you paid $1,200 in property taxes for the year and $950 in insurance and had a repair of $1,200 in mid July.  With all of these expenses, how do you calculate the rate of return?

If you add appreciation on the home along with depreciation for tax purposes, this complicates things even more.  We will assume the equity increased by $3,000 for the year, from paying down the mortgage and will calculate for one year.

You made $600 for 12 months which is $7,200.  Minus other expenses and adding equity you made $6,850 for the year.  Since you spent $55,000 to purchase the home this is a return of 12.45%.  Note that the figure of $55,000 would increase if you had to pay upfront for taxes, insurance or other expenses.

Check out a rate of return calculator at www.calcxml.com.  Thanks for reading!  Check back soon to see how to include additional years.

This post was reposted from http://finlit.biz/retirement-2/how-do-you-calculate-a-rate-of-return-for-a-rental-property/, originally written on January 30th, 2013.