Before-tax or After-tax cash flows?

Question

Do you use before-tax or after-tax to evaluate a deal?  I could see making a case for both.  What do the majority of investors use and what to banks look for?

Thanks for your input.

Klyde Waggsdale · Answer

Thanks for the help!  You guys are awesome!

Klyde Waggsdale · Answer

Thanks for the help Jon.  
            
            The only problem that I have with using my cash on cash return in year one is as follows:
            
            What if in Year 1 I have a large amount of Capital Expenditures that occur (small amount of rehab, paint, floors,fence) ?  
            
            Do I include those costs in the year 1 cash flows or do I include those with acquisition costs?

When I include the cap ex in my cash flow it makes my year one cash on cash look terrible.

Jon Holdman · Answer

Include the fix up you need to do to make it rent ready as the acquisition cost.  That's the way the IRS will treat it, any, as an addition to your basis rather than an expense.  Then, just use the expenses that are incurred after its rent ready in the cash flow analysis.

Klyde Waggsdale · Answer

That makes sense Ben.  I am going to propose a investment deal to an investor and want to make sure that the investment is as attractive as possible.

Would you then have a before-tax IRR and after-tax IRR?

How do you think they would compare?

Thanks.

Jon Holdman · Answer

After tax results are very dependent on the persons tax situation.  Anytime someone tries to show me an after tax return value, they end up making very optimistic assumptions.  Like a 35% tax bracket but somehow still able to qualify for the $25K special allowance for passive losses.   Just looking at pre-tax takes out the situation specifics and lets you focus on the deal.

Anytime IRR creeps into the discussion, I know I'm about to be bamboozled with assumptions and extrapolations.  A simple set of calculations will tell the story. Year 1 cash on cash should be sufficient.

Ben Duq · Answer

IMO I think you would have to review both pre and post tax benefits/deteriments as taxes are part of every (legal) financial deal. I think most investors are conservative and place less weight on tax effects, but to completely ignore them would not provide the most clear picture about an investment decision.

Account Closed · Answer

Before tax.

Will Barnard · Answer

Before tax is the norm and what I use. Your tax deductions/tax shelters through real estate are the means to keep more of what you earn. You can also call it gravy.