When you work with real estate investor clients, it's important that you have the knowledge to help them determine the viability of investments. Cash flow is quite important, as it disregards the deductibility for tax purposes of expenses. A tax return tells you some things, but cash flow tells you more.
Difficulty: Easy
Time Required: 15 minutes after data is gathered.
Here's How:
- Begin with the Net Operating Income of the property.
- Subtract the money out for debt service. This is the amount spent for the entire mortgage payment, interest and principle.
- Subtract any capital expenditures. This would be money spent for improvements on the property, whether they are deductible that year or not. This is actual cash spent.
- Add any loan proceeds. This is the money borrowed on a loan other than the original mortgage. If you made capital improvements, but took out a loan to pay for it, put that loan amount here as an addition.
- Add any interest earned. Should the property have loans or investments out that provide cash in as interest, add that in here.
- You have now come to the result, which is the Cash Flow Before Taxes (CFBT) for this property. Here's the line itemization:
Begin with Net Operating Income
- Subtract Debt Service
- Subtract Capital Improvements cash out
+ Add Loan Proceeds for loans to finance operations
+ Add back any interest earned
= Cash Flow Before Taxes
