Not sure how to interpret this-Schedule E - Is this good or ok ?

Question

I am working on my schedule E and this is what the year looks like for 2023. I see the numbers and I don't know how to interpret them. I don't have deprectiation in here and the monthly mortgage going towards principal. It's not an NOI but how would a lender look at this or how should I?

David M. · Answer

@Brandi K. It doesn't count as an expense on the tax return.  But, from a cash flow  / income/loss purposes, its still an expense.  Different perspectives...

Raymond J. Rodrigues · Answer

@David M., I think you're misinterpreting his question. He's asking how lenders look at the Schedule E rental income calculation based on the tax returns. Lenders do not look at leases and take 75% of that minus your mortgage payment if you've owned that property for a while already and that it should be showing rental income on your returns. The only thing you seem to be missing on there that could help you out, that is an add-back expense, is adding depreciation!

David M. · Answer

@Raymond J. Rodrigues

The rental income is shown there on his schedule so no need to look at a lease.  However, its within (or was last year) within guidelines to use expected rent schedule as my lenders have done.  So, reduced by 25%, i.e. 75% of rental income.  He already didn't include depreciation in the numbers.  Thats fine since it'd be added back in to determine DTI since its a non-cash deduction.

Henry Clark · Answer

Look at it from a cashflow standpoint.

Run your income statement all the way out.  Deduct depreciation.  Calc taxes if you owe.

Now to get cashflow.  Use your net income.  Add back the depreciation.  Deduct your principal payments.  That is your cashflow.

Other considerations.  Are you setting aside for any Capex?

Is your revenue above for a full 12 months?

Is your property tax stabilized since you purchased?  Or could it rise?

Is this year one?  Now look to either increase revenue or reduce costs.

Is your financing set to be refi’d?  Any impact to your cashflow?

David M. · Answer

@Mario Morales

Oh oh oh

Like I said, a lender will look at $8362 annually..

You would take the ~$20k net income and subject the $12k in principal payments.  Now your net income is $8k --- thats a little annoying since "eight" happens to come up twice apparently with your numbers.  So, for the year, you made ~$8k.

You shouldn't pay any income tax at this point as I suspect your depreciation would cover it.  So, your tax return would show a loss, which would be carried over as a Passive Allowed Loss.

Does that help?

Brandi K. · Answer

@Mario Morales payment made toward principal pay down doesn't count as an expense.

Brian G. · Answer

@Mario Morales you should calculate your return on investment. To calculate your cash on cash (COC) return based on what you shared: Net income - principal pay-down divided by total investment (your “all in” cost) = COC. To calculate your total return (ROI) which includes principal pay-down: Net income divided by total investment. To calculate your taxable income: Net income - depreciation = taxable income. Note: principal pay-down is technically part of your profit and thus subject to taxes (it is not an expense for tax filing purposes). Hope this helps. I can’t speak to the lending perspective but hopefully others will.

Mario Morales · Answer

Yes, it is a legal 2 unit. I have a non conforming garden unit, which I will fix up and rent out at some point. I guess what I didnt make clear, is that in this sheet, I didnt factor in what I pay towards principal in the monthly mortgage payment, just the taxes and insurance. As you mentioned for myself, do I subtract the 12000 i paid towards principal and say I really lost $4000 (principal paydown $12k- Net income of $ 8362 = 3638, which would be a loss). I think I know why its not a loss but still trying to figure it out

David M. · Answer

@Mario Morales

A conforming loan lender (is this property residential, 4units or less?) will recalc on 75% of the rent.  So, your income is ~$35700.  Net income would be $8362 annually, or $697/mo.  So, that's good approx servicing about little less than $100k or so...  Basically, add $697/mo to your monthly dti calc on your personal income side (I do my calcs split between "personal" and "rentals", then add them together)

Don't forget that they usually look at the last two SchE.

Is that what you were asking?

For yourself, I suppose its however you want.  You can come up with any set of statistics to make yourself happy, or sad.  You made some $20k this year, or some $1600/mo.  We have threads going on with people trying to get $2k/mo just so that they can retire.  Is there any expenses you can minimize to increase your profit?

Is that what you were asking?

Not sure how to interpret this-Schedule E - Is this good or ok ?

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