All Forum Posts by: Account Closed

What I'm reading is that I'm asking a supposedly simple question that you somehow can't answer, and if I really wanted to know the answer then I should pay you for some online course.

That's like the definition of a pyramid scheme. What next? I'll have to recruit others?

If you were actually trying to help you'd just explain your thought process by taking the hypothetical scenario I provided and breaking the numbers down yourself. Now THAT would be actually helpful.

See? I'm legitimately trying to learn here. You guys say there are tons of info on this forum. Well here I am trying to engage with the forums and y'all are pointing me elsewhere...

 He didn't tell me where I went wrong in my analysis. He told me I needed to buy his 460 hour online course.

 Joe, I understand Cash Flow = Cash Income - Cash Payments. I've also been told the reason you only care about cash flow is because you're supposed to take this cash flow and reinvest it.

The problem I'm seeing with this is you'll never be able to invest this entire cash flow amount, because assuming it's a positive number, then there is a portion of it that is taxable. Therefore, the amount of money you can actually reinvest is Cash Flow - Taxed Income.

I now understand that you don't remove the principal from the cash flow equation. But from my understanding, your Taxable Income = Cash Flow + Principal - Depreciation, right?

So then the actual amount left over to reinvest will be Cash Flow - Taxable Income.

Ignoring all the previous analysis I had (since I had my accounting terms mixed up) and just focusing on the one in this post, did I calculate anything incorrectly?

My goal with this post is to differentiate between Cash Flow, and the Post-Tax Net Profit (I don't know if there is a specific term for this, but basically just pure profit, taxes paid, etc etc).

So then I'm not allowed to question what I read? If I question something and ask someone to explain exactly what's going on in the background, I'm being testy? What a joke.

Ok but I'm already investing in real estate, and in the process of saving for my next deal, so saying that I'm trying to talk myself out of REI doesn't make any sense.

And I don't get your point of trying to be "too smart". Since when is educating myself and bouncing ideas off others over-thinking things? If anything it gives me new perspectives.

I presented my analysis, and asked where I am going wrong. That's exactly what someone in a math class (or any class for that matter) does to figure out how to solve problems the right way, and how not to do it the wrong way. I gave a breakdown of my thought process and instead you shoot me down, claiming that I'm trying to be "too smart". Like what the hell is that?

https://www.fool.com/millionac...

For reference, here's an article that calculates rental income after property expenses where they don't include the mortgage principal as a tax-deductible expense. They also deduct depreciation as an "expense" even though in the future it may eventually be recaptured when the property is sold (unless you do a 1031 exchange if it makes sense to do so).

The numbers from those articles is what makes most sense to me because they differentiate between cash flow and profit. What use is positive cash flow, if after paying down the principal and taxes on taxable income you are left with very little to go back and invest with?

As a buy, rent and hold investor, I'm most interested in net profit after subtracting taxable income and paying down the principal. And even though paying down the principal means I'm building equity, what good is that if it leaves me with no hard cash at the end of the month to invest in more deals?

I also don't see how grouping together the principal payment as a rental expense doesn't actually complicate property analysis. At least to me, it's easier to calculate net profit like the author of the article does and base my analysis off that number, where I can clearly see how much of my net profit is in equity and how much is in hard cash.

What are your thoughts on the pros and cons of analyzing a rental property with the way it is done in the article?

Edit: I'd also like to add - the reason I like this breakdown analysis is that since I already own a small rental property (almost one year) and knowing that principal isn't tax deductible and I have no interest in selling the property any time in the next decade or so, then when I calculate my net profit at the end of the day I want to see exactly where my money is going/growing and the exact breakdown.

Frank, thanks for the breakdown. It seems that I have my terms mixed up which is why my original question is coming off as very confusing to others so I'll have to do some homework on that end.

David, I got my formulas from Bigger Pockets and your post above. At what point in my analysis did I go wrong? Sorry but your reply just comes off like you're trying too hard to sell me on your magic pill formula. You tell me I'm overthinking everything, but for some reason I need to watch nearly 500 hours of online courses before you can tell me why I'm miscalculating cash flow. That's ridiculous.

Besides that, people always say that the number one mistake of new investors is not knowing how to run proper analysis on a property so I think its only natural for me to make sure I got everything right rather than "kinda" understanding it then investing $50k into my first deal...

Okay thanks everyone for clearing that up. So let me add a scenario with some numbers and you tell me if they add up.

These are all hypothetical numbers by the way.

Monthly Rental Income = $2,500

Yearly Operating Income: $2,500 * 12 = $30,000

Principal = $300 average

Interest = $700 average

Property Taxes = $450

Utilities (owner pays) = $450

Insurance = $150

Repairs & Maintenance = $200

Vacancy = $125

Total Monthly Expenses: $2,075

Yearly Operating Expenses: $2,075 * 12 = $24,900

Net Operating Income = Operating Income - Operating Expenses = $30,000 - 24,900 = $5,100

Depreciation: Assume $250k mortgage, where 70% is the property, so ($250k * 0.70)/27.5 = $6,363

Taxable Income = Net Operating Income + (Yearly Principal) - Depreciation = $5,100 + $3,600 - $6,363 = $2,336

Taxes Owed (Assume 24% tax bracket) = $2,336 * 0.24 = $560

Cash Flow = Net Operating Income - Debt Service = $5,100 - $560 = $4,540/year

And let's assume we've got a $30k investment into this deal...

Return on Investment = Cash Flow / Initial Investment = ($4,540 / $30,000) * 100 = 15.13%

Does this seem correct? Sorry if it seems like I'm overthinking it, but I'd rather over-analyze than under-analyze. I need to fully understand where my money will be going before I invest tens of thousands into real estate.

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?