Is this really cash flow negative?

[Jeremy Segermeister]

Hi All,

I'm still debating investing in my home market of the Bay Area, CA, or doing a STR in Maui.

Despite preferring to invest locally, I originally ruled out the Bay Area simply because I didn't think I could get something to cash flow - I'm simply not comfortable "losing money" each month and relying on appreciation. I've been working with what feels like a fantastic investor friendly agent (whom also has a finance background). However, she sent me an investment model that I simply don't understand. 

- My interpretation of cash flow is simply the mortgage payment minus expenses. 

- Her model incorporates the tax benefits associated with the investment property (mortgage interest, depreciation deduction etc. ) and also adds an appreciation assumption. 

Example using arbitrary numbers - 

• Gross Rent: $1,000/month
• Gross Expenses (HOA, tax, mortgage + interest,): $1,200
• Depreciation: $300
• Marginal Tax rate: 30%

I perceive this as a negative $200 cash flow. Because of my income, I can't claim a loss.

Her model takes the expenses + depreciation ($1500), calculates the tax savings associated with the property ($1,500 x 30% = $500/month). Therefore her claim is that the $1,200 in expenses is really $1200-$500 = $700 and thus a $300/month cash flowing property.

Am I crazy for being confused by this? She is saying I could adjust my W2 witholdings from my employer to achieve the same thing if I wasn't comfortable being negative each month.

Perhaps someone here can help? I'll also be reaching out to a CPA to clarify.

[Bill B.]

Again. Nobody is counting the $300/mo in principle pay down. That IS INCOME. 

Taking the tax rate off real expenses make no sense at all, that’s not income and a very bad comparison. 

I’ve told the story before but I have a negative $500/mo cash flow property that makes $12,000/year before the $16,000 depreciation. Meaning I make $12,000/year taxfree and I’m carrying $4k/year in losses forward. (I bought for appreciation and eventual retirement while it was “affordable”)

That said, I’m not saying this is a good deal, I’m just repeating that more than 90% of the experts on here found the entire mortgage payment as an expense. It’s 100% a negative cashflow event but not 100% an expense.