Real Pro Realty - Tonawanda, New York

Cash Flow

Of critical important to real estate investors is the cash flow calculation. A property must pay for itself, unless the investor expects to subsidize his losses from his other assets or income. Cash flow may be estimated as follows:

Gross Receipts

Less:     Financing costs

Less:     Taxes and Insurance

Less:     Utilities

Less:     Supplies, Maintenance, Repair, Legal costs, other costs.

Equals: Estimated Net Profit

From Gross Receipts be sure to make reasonable allowance for uncollected rents and vacancies. By financing costs, here we mean the monthly payment for principal and interest on the mortgage. For bank mortgages there are also other non-recurring costs not addressed under this page.

Utilities may include water, electric or gas. In this Western New York area, most, but not all, real estate, has one water meter, and the landlord pays the bill. New York State law does not permit the landlord of residential real estate to assess a separate charge for utilities in addition to the rent. For this reason, you should check to see that there are separate meters for electric and gas when you are shown the property.

To calculate the estimated monthly carrying costs of a property use the above formula. As you can see, the calculation yields an estimate of what you think it may cost. Your Realtor can help you determine some of these expenses. For items, such as taxes, that may be paid on an annual basis, divided by twelve.

Capital improvements and market appreciation, if any, are not factored into the above calculation. Capital improvements may become part of your tax basis in the property. Whether there is market appreciation in your investment is separate from its monthly carrying expenses.

No included in the above formula is the depreciation expense which is a tax benefit of investments real estate ownership, and is reported on Schedule E and Form 4562 of a personal federal return. Depreciation may result in a tax loss for the property, even when it has a positive cash flow.