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Updated over 5 years ago on . Most recent reply

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Counting principal as a rental expense to estimate cash flow

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Hi, I'm really interested in learning to analyze deals/properties for future investments. I've noticed in pretty much every analysis in videos and blogs, the person will deduct the entire mortgage payment (interest + principal) as a rental expense, before going on to calculate Yearly Cash Flow.

But the principal is NOT a tax-deductible expense. So why is it included as an expense in their calculations? Perfect example, see here: https://www.biggerpockets.com/...

Shouldn't the calculation actually be:

Yearly Cash Flow = ( (Rental_Income - Tax-Deductible_Rental_Expenses - Depreciation) - Taxes ) - Principal_Payments)

If I'm wrong, tell me why. I just don't get how the principal (a non-tax-deductible expense) is always included as one of the tax-deductible rental expenses in all these calculations. It makes no sense to me. What am I missing?

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Joe Villeneuve
#5 All Forums Contributor
  • Plymouth, MI
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Joe Villeneuve
#5 All Forums Contributor
  • Plymouth, MI
Replied

Your cash flow analysis should only include all that impacts your cash income,  The mortgage payment does.  Depreciation has nothing to do with cash income.  Whether or not an expense is tax deductible has nothing to do with cash income. 

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