Questions about cashflow......

[smack123]

2 quick questions about cashflow.....

1. Should I be including mortgage principle in my calculation to determine if a property will cash-flow, or do I include only expenses such as mortgage interest, property tax, property management, income tax and maintenance.

2. Along the same lines, if I have a HELOC on same property, and I am using those LOC funds for other purposes should I becounting the interest charges against this house, or accounting for it otherwise? It seems obvious on the surface that because it is for other purposes that it should be accounted for otherwise, but the reality is if I sold the house I could (and would ahve to) pay off the LOC... so therefore they are sort of connected.

Answering these 2 questions would really help me to figure out where I`m at

Thanks everyone!

 

[Phantomtib]

From what I understand:

I would include principal and interest as part of my expenses for a rental property just so that you know you are paying down the mortgage as fast as possible. The only reason not to pay principal is if you took out a HELOC. A HELOC used from your PRINCIPAL residence for 100% investment purposes is tax deductable. Therefore, I think its better to be paying down a mortgage that does not have any tax advantage and pay interest only payments on a HELOC that is tax deductable.

Does that help?

 

[smack123]

QUOTE (Phantomtib @ Feb 26 2009, 10:05 PM) From what I understand:

I would include principal and interest as part of my expenses for a rental property just so that you know you are paying down the mortgage as fast as possible. The only reason not to pay principal is if you took out a HELOC. A HELOC used from your PRINCIPAL residence for 100% investment purposes is tax deductable. Therefore, I think its better to be paying down a mortgage that does not have any tax advantage and pay interest only payments on a HELOC that is tax deductable.

Does that help?

Hmm, I`m not sure that it does, but I do really appreciate your help. maybe a little more information will help to clarify my situation.

I already have an existing mortgage on the property (P= $450/month & I= $650/month), so I guess I`m just trying to determine whether or not the principal portion should be counted in cashflow calculation, given that this portion is paying down the mortgage whereas the interest portion is just disssapearing into the bottomless debt servicing pit.

Similarly, I have a LOC on this same property, which I am using for other purposes (down payment on my principal residence, education, etc.) The interest on this LOC costs me $320/month.

If I include the $450 and the $320 in my cashflow calculations I am losing $550/month, BUT if I don`t include them the house cashflows at $220/month.

Just trying to understand how I should be viewing my present situation.

Thanks! Anyone else with comments/suggestions??

 

[smack123]

Here is the other way to look at it:

TOTAL REVENUE: $1700

TOTAL EXPENSES: $2250
Mortgage Interest: $ 650
**Mortgage Principal: $ 450
Income Tax: $200
Property Taxes: $ 150
Insurance: $ 80
Property Management: $ 200
**LOC Interest: $320 (BUT, the LOC funds are being used for alternative purposes)
Contingency: $200

**BUT, like I said, if the LOC interest payments and the mortgage principal are removed, the hosue cashflows to the tune of $220/month.

Which scenario is correct?

 

[ekisielewski]

QUOTE (smack123 @ Feb 27 2009, 10:45 AM) Here is the other way to look at it:

TOTAL REVENUE: $1700

TOTAL EXPENSES: $2250
Mortgage Interest: $ 650
**Mortgage Principal: $ 450
Income Tax: $200
Property Taxes: $ 150
Insurance: $ 80
Property Management: $ 200
**LOC Interest: $320 (BUT, the LOC funds are being used for alternative purposes)
Contingency: $200



Hi: Yes. Mortgage Principal needs to be taken into consideration. Even though it is building equity for you it needs to be paid every month. Therefore, it affects your cashflow.

Same for you LOC. If you are using this LOC for other purposes, calculate how much of the interest belongs to the portion being used for your rental. And only use this in your cashflow formula.

Why do you have a 200 expense for Income Tax? What is this?

Good Luck
Elisabet Kisielewski


**BUT, like I said, if the LOC interest payments and the mortgage principal are removed, the hosue cashflows to the tune of $220/month.

Which scenario is correct?

 

[EdRenkema]

QUOTE (smack123 @ Feb 27 2009, 11:45 AM) Here is the other way to look at it:

TOTAL REVENUE: $1700

TOTAL EXPENSES: $2250
Mortgage Interest: $ 650
**Mortgage Principal: $ 450
Income Tax: $200
Property Taxes: $ 150
Insurance: $ 80
Property Management: $ 200
**LOC Interest: $320 (BUT, the LOC funds are being used for alternative purposes)
Contingency: $200

**BUT, like I said, if the LOC interest payments and the mortgage principal are removed, the hosue cashflows to the tune of $220/month.

Which scenario is correct?

You`re making it too complicated. Mortgage payment is a payment, no need to separate P & I , talk to your bank to get your payment as low as possible to maximize cashflow.
Income Tax??? we all pay it but don`t factor it into cashflow analysis.

calculate:
mtg payment +
P. tax +
Insurance +
PM or condo fees +
LOC int. fees (only for that portion allocated to property purchase) +
vacancy +
repair & maintenance

Vacancy rate will depend on area and R&M will depend on type and age of property.
Add all together to determine if property has positive or negative cashflow.
If you are consistently dealing in the same type of properties in the same area you will know these numbers off the top of your head, thats why becoming a specialist is so important.

 

[smack123]

Elizabeth and Ed,

THANK YOU both very much for your responses. I now have a better understanding of where I stand.

Okay, so I will include both P&I on the mortgage - I understand where you are coming from. None of the LOC funds are being used to finance this property so I will not attirbute these to cashflow. I also made the (apparently incorrect) assumption that I should factor in my income tax expense (related to rental income) in to my cashflow, but if it does not apply I will remove it.

Therefore, my cashflow situation is -$30 per month

TOTAL REVENUE: $1700

TOTAL EXPENSES: $1730
Mortgage: $ 1100
Property Taxes: $ 150
Insurance: $ 80
Property Management: $ 200
Vacancy and Maintenance: $200

It appears that rents are falling somewhat in the Edmonton region, perhaps in the $150-200 range. If, when the current lease expires in June, I am only able to get, say, $1500 for rent, and my cashflow is now -$230, should I be looking to get out?

 

[ChrisDavies]

QUOTE (smack123 @ Feb 27 2009, 10:35 AM) It appears that rents are falling somewhat in the Edmonton region, perhaps in the $150-200 range. If, when the current lease expires in June, I am only able to get, say, $1500 for rent, and my cashflow is now -$230, should I be looking to get out?

That`s a cost/benefit question. If you bail, what`s the total financial picture? Will the gain from selling be more than that from holding out for a year, eating the $2700 and being back up in a year when the market is stronger (for sales and rentals)? Personally, I`d say hold it, rent as best you can and eat the negative cashflow. The reality will likely work out to be less than the $230 negative cashflow, and you`ll be back up to break even in a year.

Always do the hard numbers and understand how it all fits into your long term plan.

 

[smack123]

QUOTE (ChrisDavies @ Feb 27 2009, 12:55 PM) That`s a cost/benefit question. If you bail, what`s the total financial picture? Will the gain from selling be more than that from holding out for a year, eating the $2700 and being back up in a year when the market is stronger (for sales and rentals)? Personally, I`d say hold it, rent as best you can and eat the negative cashflow. The reality will likely work out to be less than the $230 negative cashflow, and you`ll be back up to break even in a year.

Always do the hard numbers and understand how it all fits into your long term plan.

Therein lies the problem, trying to come up with any sort of logical prediction on where things will be 1-2-5 years from now. The predictions run anywhere from (positive) the start of a real estate value recovery in the latter half of 2009, and continuing up in 2010.....to (negative) my +/-$325,000 property being worth $50,000 18 months from now.

Given scenario #1 it`s a no-brainer, I would definitely hold and wait for the rebound. However, if scenario #2, or a variation thereof occurs, how many decades will the recovery take?

Along the same lines, okay, so I`m pulling $1700 in rent right now, and maybe it drops to $1500, but what if rents drop to $1000? $900? $800/month.

 

[PaulPoulsen]

QUOTE (smack123 @ Feb 27 2009, 11:35 AM) It appears that rents are falling somewhat in the Edmonton region, perhaps in the $150-200 range.

I don`t find this to be the case at all. All our rents are holding steady and we`re even anticipating minor increases when our leases come due.

Do you mind if I ask where you`re getting those numbers from?

 

[smack123]

QUOTE (PaulPoulsen @ Feb 27 2009, 03:36 PM) I don`t find this to be the case at all. All our rents are holding steady and we`re even anticipating minor increases when our leases come due.

Do you mind if I ask where you`re getting those numbers from?


Paul, this was from my property management company. Given that I am located in BC, and not directly in tune with present rental market conditions I sent them an email (as the present lease expires in June and the tenants are moving out as they are having a house built) and asked them what the present rental market was like, whether rents were holding etc. It has been rented at $1700/month for the past 18 months.

They advised me they have been dropping rents on condos and houses, anywhere from $150-200/month.

 

[Phantomtib]

I think it has to do with the fact that there are more houses for rent than before and now people have the option of choosing the best rental for their families. At least in Calgary its appearing this way.

 

[ChrisDavies]

QUOTE (smack123 @ Feb 27 2009, 01:43 PM) Paul, this was from my property management company. Given that I am located in BC, and not directly in tune with present rental market conditions I sent them an email (as the present lease expires in June and the tenants are moving out as they are having a house built) and asked them what the present rental market was like, whether rents were holding etc. It has been rented at $1700/month for the past 18 months.

They advised me they have been dropping rents on condos and houses, anywhere from $150-200/month.

I`ve been finding that things have been holding or declining slightly, but not that far. It`s taking a little more work than people are used too, but compared to pre-2000, it`s still just fine. There`s lots of ways to make sure you`re getting good rents. You might see how you can help your PM.

 

[mortgageman]

QUOTE (smack123 @ Feb 27 2009, 11:35 AM) Elizabeth and Ed,

THANK YOU both very much for your responses. I now have a better understanding of where I stand.

Okay, so I will include both P&I on the mortgage - I understand where you are coming from. None of the LOC funds are being used to finance this property so I will not attirbute these to cashflow. I also made the (apparently incorrect) assumption that I should factor in my income tax expense (related to rental income) in to my cashflow, but if it does not apply I will remove it.

Therefore, my cashflow situation is -$30 per month

TOTAL REVENUE: $1700

TOTAL EXPENSES: $1730
Mortgage: $ 1100
Property Taxes: $ 150
Insurance: $ 80
Property Management: $ 200
Vacancy and Maintenance: $200

It appears that rents are falling somewhat in the Edmonton region, perhaps in the $150-200 range. If, when the current lease expires in June, I am only able to get, say, $1500 for rent, and my cashflow is now -$230, should I be looking to get out?

Do you have a variable rate mortgage on this property? If so, phone the mortgage company and ask them to reduce the payments to reflect today`s lower interest rates. This will free up cash and improve cash flow.