Cash Flow Analysis – Real Estate Investing – Part 6 A
This is Part 6 A of my Real Estate Investing Series. You can view the first 5 Parts here:
Are you planning for your Future? Real Estate Investing – Part 1
Starting at Home! Real Estate Investing – Part 2
Maintain Your Leverage! Real Estate Investing – Part 3
Picking Your Investment Property – Real Estate Investing – Part 4
Location * Location * Location – Real Estate Investing – Part 5
Part 6 is Cash Flow Analysis. This area can be dry and complex, therefore I am breaking it down into several parts. You may go to my web site and get a Free Cash Flow Calculator and down load a copy of the live example at the same time. Today I am going to focus on the basic Annual Cash Flow Analysis.
I believe my example is very conservative and realistic in this market. The numbers are simplified over some other analysis. I will go into some of the reason for the simplifications latter on. This assumes a new home purchased at $200,000.00 with 20% done and a 30 year loan at 6%. I am assuming a monthly rent of $1,800.00.
MONTHLY PROJECTED RENTS: As an investor enter your monthly rents on line 1, projected or actual. For most of you this will be one amount. If you have more than 1 unit on the property you will need to add in the different rents to get a monthly total.
ANNUAL PROJECTED RENTS: Projects out the annual rental rate based on one year.
ESTIMATED EXPENSE MODIFIER: Here I project annual operating cost. This is a very subjective number with a lot of variables. If you have a large unit with a history you may be able to project expenses into more detailed categories. Those categories should include vacancies, maintenance and repairs, taxes, management fees, insurance, and any other cost you may have. If you have a single family home or a small property with a few units your cost can fluctuate from year to year. You may have no vacancies for a long time and then have trouble finding a new tenant. You may have almost no maintenance cost then have an unexpected issue come up. I have used the figure 25% as many lenders used to discount 25% of expected rents when projecting income on a property. I suspect this is high and I am not sure if it was meant to include property tax cost. I have not included property tax in this figure.
ESTIMATED EXPENSE: This is the projected expenses in a dollar amount rather than a percentage. I suggest you budget in 25% expenses and when they are less bank the extra money against future years when you may have unexpected expenses.
ESTIMATED PROPERTY TAX & ASSESSMENT %: This is the projected property tax and assessments for a single year on a percentage basis. In California this is generally a fairly predictable number. The tax basis for your home will be the purchase price. Generally speaking the basis can only go up 2% a year from your starting basis, it may go down in a depreciating market. Taxes are limited to 1% of the tax basis. However, a number of cities and local districts have been able to get around this limit and attach other assessments. In this area I estimate property taxes and assessments at 1.25% of the tax basis (purchase price in year one.) There are a number of other factors that can come into play, but this is the basics for most people.
ESTIMATED PROPERTY TAX & ASSESSMENT $ VALUE: This is the projected property tax and assessments projected on a dollar basis. Remember this will change from year to year, but in California it will usually not go up more than 2% a year over the initial basis.
NET OPERATING INCOME: This number is your operating income after expenses. Remember this number will actually vary year to year based on actual expense.
DEBT SERVICING: This is your debt service or the cost of your loan on a month to month basis. In this example this is a 30 year loan, fixed at 6%.
BEFORE TAX CASH FLOW: This number represents the before tax net cash flow. Some may be looking at these numbers and be discouraged.
The thought goes through the head, all that investment and all that work for a measly amount of money. Well don’t be. We are going to look at some other aspects latter that will open your eyes. Keep in mind these things:
- This is a conservative estimate.
- I am looking at long term investment strategies now (Buy and Hold).
- If you have a long term fixed loan the debt service will remain fixed, but it would not be unreasonable to expect rents and property values to rise.
- In the market a few years ago this would have been a negative number for most investors, now is a great time to invest.
Watch this blog for further updates in the series.
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