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     Cash Flow Statement  -  Real Estate Cash Flow
                               ( See Report Below )  
 
  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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