Positive Cash Flow

[jarrettvaughan]

if a property has a negative cash flow of $100.00 but you are having a debt reduction of $150.00 (for example) does that allow one to say that the property has a positive cash flow of $50.00. The reason i ask is becuase i have see a couple investors make this type of presentation to to spin a negative positive cash flow property into something better that it is?????? I am wondering if this is common and ethical as it seems to be a bit misleading to me?

 

[invst4profit]

No that is negative cash flow of $100/ month.
The $150 is equity that is only realized by refinancing or selling the property.

 

[Merriora]

QUOTE (invst4profit @ Dec 20 2007, 10:37 AM)
No that is negative cash flow of $100/ month.

The $150 is equity that is only realized by refinancing or selling the property.




So just to be clear...If instead of having a mortgage with a $150 debt reduction per month, the investor had an interest only mortgage ($0 debt reduction), then this would be a positve cash flow since you would have the money in your pocket each month (and not need to refinance). Correct?



I think this thread really shows how you can't just take a person's word on positive cashflow, but instead crunch the numbers and see if it fits in your defininition as an overall good investment.

 

[gwasser]

I think the purpose of positive cashflow is to show that you can run a rental property without adding money out of your own pocket. As such, paying of principal is, in my eyes, just placing your incoming cashflow in a different savings account than your regular chequings account. I count it as part of incoming cashflow - if I need the cash, I can always refinance or I should, as pointed out in an earlier post, use a line of credit instead of a mortgage.

One of my rental pools deducts $100 from my monthly distribution until there is a $1000.00 reserve for emergency repairs. That money is mine but placed in a different account than my regular chequing account. As such it is part of incoming cashflow not an expense. Just ask revenue Canada!

Similarly, in many cities, one has the option to participate in a TIP plan to pay for property taxes. As such, you may overpay because of the payment schedule. If you overpay, the money will be returned to you sooner or later. As such the overpayment is part of incoming cashflow. The same for utility bills that are on a budget plan.

To put it in a more extreme form. I recall that Don recommends that each property has an emergency fund account. I certainly would count my contributions to such an bank account as part of incoming cashflow. Neither do I think Revenue Canada would consider such a contribution as an expense until it is applied to a repair.

The reason that I don`t count contributions to a Condomium Reserve Fund as incoming cashflow is because it is usually non-refundable. I have never heard that someone upon the sale of a condo received money to be compensated for the cash level of the Condo Reserve Fund.

So I definitely disagree with some posters in not counting principal repayment or any other payment into a reserve fund (other than the Condominium Reserve Fund) as not part of incoming cashflow. Afterall it is refundable when needed. In the end, I want a decent return on my equity in the investment. How to collect these returns is based on my needs both in terms of need for cash, costs of cash vs appreciation, different taxation etc.