Monthly Principle payment added to bottom line?

Question

Hi Everyone,

I have a question in regards to getting to my true profit from a flip. Below is the example and question.

Say I'm flipping a house and my monthly P&I is $500.  With $75 of that being Principle.  I hold the property for 6 months and after my rehab cost, my monthly holding cost of $3,000 ($2,550/Interest, $450/principle) and all other fees, commissions, closing cost etc. I show a a profit of say $1,000.

Here is my question, should I add back that $450 principle so my real profit is $1,450? Or is that not really profit because I paid it and its just being returned to me?  Then again if I counted it in my holding cost as an expenses then it would be profit?

As you can see I'm stuck in a circle and I don't know if I'm just over thinking it and missing the obvious answer.

Thanks for the help

Sam

Brett Russell · Answer

@Sam Erickson

I understand the question as you posed it and, yes, your proceeds at the closing table would be $450 higher because of that principal paid down.

But, what you're forgetting is that your proceeds from the closing will be much higher, BUT a lot of it won't be profit.  From your closing proceeds you need to pay yourself (or a private/hard money lender) back for the down payment and rehab costs as well as all your financing costs and then you will have your profit left over.

Sam Erickson · Answer

Thanks for the responses one more question to throw out.

Say I buy a house for $120,000 my loan is 100,000 I pay my monthly payment for 6 months like above and $450 of the total paid is principle. When I run my numbers though I uses a mortgage pay back number of $100,000. which results in the $1,000 profit.

My true mortgage payback though is $99,550 (100,000 minus the principle I paid down).

So even though in my estimates i'm not taken into account the principle pay down when I go to the real closing I'll actually walk away with $1,450, correct?

Craig Brouillette · Answer

The simplest way is probably just not to count the principal payments in my holding costs.

Patrick L. · Answer

You don't add it back to the bottom line because you can never take a principal payment as an expense.  It may have an effect on your monthly cash flow but principal payments are not an expense and cannot be deducted.

Brett Russell · Answer

Hi @Sam Erickson

No, your principal paydown does NOT create more profit for you because, as you said, you are just getting back something you already paid.  If you instead chose to pay $1000/month and thus paid down an extra $3K during those 6 months, you wouldn't say it was now a more profitable flip, right?