I am new to multi family. As both a Realtor and Investor, I want to provide the best and most accurate info to buyers and sellers as well as understand it. How do I look at an income statement that shows a negative cash flow?. How do I factor in depreciation and all other advantages tax wise?
@Chrissy Severance Is the cash flow consistent? What expense items are the highest? Are there ways to decrease the expenses and/or increase the income? If you've just purchased a property and there is negative cash flow because you are doing renovations, stabilizing the property, or poor management by the prior owner, then it is less of a concern than if you've held the property for while and the cash flow is still negative.
Depreciation is typically factored in after the cash flow.
1. Is there an owner occupant where income could be?
2. Look for areas where expenses seem higher than normal (ie: landscaping, insurance, property management)
3. If the rents are not at market value, sell it on proforma. I break it down as proforma-as-is and another column of proforma-renovated.
Thank you so much for the input. Having options and knowing all the factors helps. The current owner/management company is slow to get back with me.
@Chrissy Severance , if you want to continue and grow in investment real estate, I’d recommend you pursue the CCIM designation. Check the website at CCIM.com and look over the topics for the courses. It’s very valuable for any commercial real estate and investment properties. Contact me if you want to discuss it further.
@Chrissy Severance A lot of good suggestions above and the CCIM courses are a great in depth education on investment properties.
Another good resource is Adventures in Commercial Real Estate. they have a lot of models that will help you get familiar with how to create an income statement and where all the line items fall. Also have a really good class that teaches how to model in excel.
Depreciation is normally an after tax calculation ingredient that will determine after tax cash flow and returns. Will also impact the walk away money for a client at the sale of a property.
@Chrissy Severance , I would consult with an accountant. There are several financial statements that all factor together. Your income statement for many rental properties will stop at NOI. But a true income statement will also have "below the Line" items like depreciation, debt service/interest expense, maybe partnership level fees, etc that are not driven by the property operations. An income statement will never include capital expenditures.
Then you have a statement of cash flow. This will have basically all receipts for incomes, and all checks written. This will not include items like depreciation, because that is a non-cash expense. But it does include capital expenditures, which are often times non-recurring.
Combine these two with the balance sheet, and you can get a full financial picture of this asset. But the balance sheet, again, will not be stand alone document to get a sense of what the property is doing.
Thank you all. Much appreciated.
If you are not the listing agent, you may not want to provide an 'income statement' to your buyer. You may be putting yourself at risk if the numbers are not accurate upon purchase.
I would provide any proforma's that are provided by the seller agent.
To answer some of your question.
Cash flow = rental income - cash expenses
Taxable rental income = cash flow - depreciation + principal paydown.
Best of luck
Thank you. I am the listing agent. I have expressed the concerns with the inaccuracies with the numbers. The seller has chosen to take care of all repairs and upgrades to increase the value. We will re list as the project gets underway. Thanks again