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.