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The cash flow statement for real estate income
property is by far the most important financial
statement generated by the On Target software. It establishes the
viability of your investment. A negative after-tax cash flow in the
first year of operation indicates that you will be feeding the
property to keep it going. Positive after-tax cash flows indicate a
profit. ( Money in Your Pocket ) It is important to get the input
data set up correctly for your first year of operation. If the
rents are at market value when you purchase an income property and
you won't be increasing the rents during your first year of
operation, set the first year income growth rate to 0 (Zero) via the
Set Year-to-Year Growth Rates Screen.
In summary, you should have a good understanding of each line
item on the Cash Flow Statement. The net operating income
on the Cash Flow Statement below is
used in 2 very important real estate ratios, the cap rate and the
debt coverage ratio. The cap rate can be compared to a market cap
rate for the type of property you are analyzing to determine if the
property is over priced. The debt coverage ratio measures
risk. Lenders use the debt coverage ratio to determine if the
income for a property is sufficient to cover operating expenses and
debt service. The Before-tax cash flow and after-tax cash flow
amounts are used in the Cash on Cash return calculation. Cash
on cash return measures the return on your initial investment
amount. The Cash Flow Statement should play an important role
in your buy and sell decisions.
Federal Tax Liability / State Tax Liability - These
are the amounts of federal taxes and state taxes that you will owe
on the taxable income that was computed on the income statement.
State taxes are deductible on your federal return and are subtracted
from the taxable income amount before computing your federal tax
liability.
Capital Additions - are permanent structural
improvements which add value to a property such as a new roof,
an addition, new siding, etc. The cost of a capital
addition is subtracted from the after-tax cash flows in the year
that it is put into service. You can offset the cost of a
future improvement by putting a loan on the property using Loan
3 entry fields. Residential improvements are depreciated
over 27.5 years and commercial improvements are depreciated over
39 years.
Balloon Payment
- Interest only loans with a term of less than 10 years result
in a balloon payment. You can balloon both an interest
only loan and a fully amortized loan. A balloon payment
can be offset by adding a future loan via loan 3. If an
offsetting future loan is not put on the property, the balloon
payment amount will be subtracted from the after-tax cash flows
for the balloon year and will reduce the cumulative after-tax
future wealth.
Refinancing - You can put a future loan on the property to
offset an improvement or balloon payment via Loan 3. A future
loan can also be used to take cash out of a property.
Net Present Value
- also known as discounted cash flows is a valuation method
which discounts cash flows in the future back to the present to
estimate the attractiveness of an investment. The calculation
uses the initial investment amount, the series of after-tax cash
flows and the after-tax sales proceeds in a given year and discounts
these values back to the present with a discount rate that reflects
the investment risk and anticipated return. A negative net
present value suggests that the investment doesn't meet investor
expectations. A positive net present value indicates that the
investment meets expectations. The larger the net present
value, the better the investment.
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