Do you factor in - Mortgage Paydown, Tax Advantages & Appreciation?

Question

Two part question. I'm looking for a good way to quickly calculate principal paydown of a mortgage and the tax benefits of my investment properties.

I currently do the paydown manually (takes too long), and I don't factor in any tax advantage.

I project appreciation but I don't factor that in what evaluating a deal unless there is a forced appreciation via a renovation situation.

What are your thoughts? What template or calculator have you found that works best for quickly running these numbers for you?

Dan H. · Answer

I am often the contrarian and this is another example.

I am all about return and those that think appreciation is speculation simply do not know the numbers.

My primary market has never had a 10 year period without appreciation.

Neighborhoodscout provides appreciation numbers on every large city in the US for a handful of look back dates and ranks the appreciation nationally and by state. Even the worse appreciation cities, which often are cities with declining population, have positive appreciation for this century. I will use Cleveland as an example. Population has fallen every decade since the 1950s. Neighborhood scout shows Cleveland has 2.52%/year appreciation for this century.

Long term appreciation is a virtual certainty. To leave it out of underwriting is a mistake IF you are doing long term underwriting.

what I do in my underwriting is I project a conservative long term appreciation and use current economic outlook/sentiment in my near term years. In my market, I have been using 0% appreciation for 5 years and I started this in 2022 which was maybe a year to 1.5 early (but I want my underwriting to be conservative).

Anyone that thinks rents do not go down is ignorant to various events and markets. During the GFC many market rents were not greatly impacted but Las Vegas, Detroit, much of Arizona, etc had huge income declines between higher vacancy and reduced rents. More recently the dmv (dc, etc) area had huge cut in section 8 rent resulting in many markets’ having large rent declines.

What do you think dictates long term cash flow. It is not the initial cash flow. It is market rent growth that is tightly coupled to appreciation. Those that are not including appreciation, are you also not including market rent growth? If you are including market rent growth, how are you justifying including market rent growth but not appreciation?

Here are City of San Diego (San Diego metro is my primary RE market) median rents

- 2025: $2995/month. 2 Beds $3,095, 3 Beds $4200.

- 2020: $2344/month

- 2010: $1323/month

- 2000: $747/month

Lets say I bought in 2010 with zero cash flow after including vacancy and all sustained expenses (in 2010 it was easy to get some positive cash flow at high investor LTV (unlike today), but I am using this as an example only and not reflecting the actual 2010 reality), how would your cash flow be today recognizing rents increased over $1650/month by 2025? How would it have been over the 16 years assuming no extraction of value? How do you think the cash flow over the 16 year hold would compare to Cleveland? Same exercise using either the year 2000 or the year 2020?

Without including conservative projection of appreciation and market rent growth, your underwriting will favor the higher initial cash flow markets. These markets have the worst appreciation and rent growth outlooks, but you for some reason are choosing to exclude that data so the market looks good when historically these markets have produce poor long term returns..

My point is a thorough underwriting should model different scenarios, but in every scenario i would include conservative long term appreciation. To this end, I challenge anyone to find a large city in the us (I will define large city as being large enough that neighborhoodscout provides free appreciation history) that has not appreciated this century. It is much more certain than that rents will not decline in the near term as it is virtually 100% sure that there will be long term appreciation assuming no one can find a single counter example.

RE is challenging today. It is tough to find a RE that justifies the effort and risk of residential RE. Why make it even more challenging be excluding a virtual certainty such as long term appreciation from the underwriting?

Good luck

Stephany G. · Answer

Your instinct is right. I'd keep the buy/no-buy decision on cash flow and only look at the other three as "bonus" returns. A few shortcuts. Paydown: you don't have to calculate it by hand. Any amortization schedule (the table that splits each loan payment into interest and principal) gives you year-one principal in one line. Google Sheets and Excel both have a CUMPRINC function that returns it directly. Rough guide: on a new 30-year loan at around 7%, only about 1 in every 8 dollars of the payment goes to principal in year one, so it's smaller than people expect early on. Tax: the big one is depreciation (a paper expense the IRS lets you take on the building, not the land, spread over 27.5 years for residential). Building value ÷ 27.5 = the yearly write-off. What that's worth in cash depends on your bracket, so I'd ask a CPA once and reuse the number. Appreciation: I agree with leaving it out unless it's forced. If a deal needs it to work, it's a bet, not an investment.

Addy Chupa · Answer

Spencer, since you're comparing properties you already own rather than deciding whether to buy, I'd measure each one against the equity sitting in it today, not what you originally put in.

For each property, one line a year:

- Current equity: a realistic value today minus the loan balance, minus roughly 6-8% for selling costs. That's what you'd actually walk away with.

- Cash flow after reserves for repairs and CapEx.

- Principal paid down this year.

- Rough tax benefit: depreciation times your marginal rate, but only if you can actually use the loss this year.

- Add those up and divide by current equity. That's your return on equity.

The useful part is the side-by-side. A house you bought years ago can look great on your original down payment but only earn 3-4% on the equity it holds today, while a newer one with no cash flow can come out ahead because the paydown is working on a much smaller equity base. When a property's return on equity drops below what that money could earn elsewhere, that's when a refi, a 1031 into something better, or a sale is worth a look.

I'd keep appreciation out of the base number like you're already doing and track it as its own column.

Muyees Ayilara · Answer

Spencer, yes, you should factor all three in, but you should factor them in separately. Do not mix them together or you will think a bad deal is a good deal.

This is how I run it for my Florida rentals:

1. Cash flow first. This is the only number that pays the mortgage. Rent minus PITI, minus taxes, insurance, vacancy, maintenance, management. If this is negative, I do not buy it just because the other three look good. Cash flow has to stand on its own.

2. Paydown second. You are right, doing it manually takes too long. Use CUMPRINC in Google Sheets. It is the fastest way I found.

Put this in a cell for Year 1: = -CUMPRINC(rate/12, 360, loan amount, 1, 12, 0)

Rate is your interest rate, 360 is 30 years, loan amount is your loan. Change 1 to 12 for Year 1, 13 to 24 for Year 2. It gives you the exact principal your tenant paid down for you that year. On a $300k loan at 7.5%, that is about $2,800 in Year 1, about $3,000 in Year 2, and it grows every year. I track that as a separate line called Tenant Paydown.

3. Tax benefits third. This is where most new investors miss money. Depreciation alone is huge. Residential is 27.5 years. On a $300k property, if the building value is $240k after land, that is about $8,700 a year in depreciation. If you are in a 24% bracket, that is about $2,000 a year back in your pocket. Add cost seg on top if you do it, and Year 1 can be $15k to $25k in depreciation. I do not use tax benefits to justify a negative cash flow deal, but I do add it after cash flow to see my true return.

4. Appreciation last, and only forced appreciation. You are doing it right. I do not count market appreciation in my buy decision. I only count appreciation I create. If I buy at $300k, put $60k in rehab, and it appraises at $420k, that $60k in forced equity is real. Market appreciation at 3% a year is a bonus, not a plan.

My simple template is 5 lines:

Cash flow + Paydown + Tax savings + Forced appreciation = True return

Cash flow is monthly. The other three are yearly. If you run it that way, you will see why a property that looks like it makes $200 a month is actually making $800 to $1,000 a month in total wealth when you add paydown and taxes.

If you want, I can send you the Google Sheet I use. You just put in purchase price, loan, rate, rent, and rehab, and it spits out all four numbers in one page.

Ashish Acharya · Answer

Spencer, that's really the right way to look at it. Once you have the principal paydown and cash flow numbers separated, you can start seeing which properties are actually performing and which ones just look good because of appreciation or debt paydown.

The piece I'd add is the tax impact. Two properties with similar cash flow can have very different after-tax results depending on depreciation, interest, passive loss limitations, and your individual tax situation.

I'd probably keep the spreadsheet simple and use it to identify which properties deserve a closer look. Then layer the tax analysis on top rather than trying to make the spreadsheet estimate a tax benefit that may not actually be usable that year.

Since you already have three doors, that could be especially useful when deciding whether to keep, refinance, or sell one property and redeploy the equity.

Happy to connect!

Divin Kanyama · Answer

@Spencer Dixon I’d separate cash flow, principal paydown, and estimated tax impact rather than roll everything into one return figure. For paydown, Vertex42’s Loan Amortization Schedule is worth a look: it separates principal and interest, tracks the remaining balance, and supports extra payments on fixed-rate loans. I’d total the principal column for each year and keep that equity growth separate from spendable cash flow.

For taxes, I’d use a separate worksheet based on rental income, deductible expenses, interest, and depreciation—not assume every paper loss produces an immediate refund. Loss limitations can defer the benefit, so I’d have a CPA validate the assumptions for your situation. Your approach to appreciation makes sense to me: keep it out of the base case, and test renovation-driven value gains separately after accounting for the project’s costs. I’d want the deal to stand on its operating numbers before relying on projected tax savings or appreciation.

James Jones · Answer

I don't — not when I'm deciding whether to buy. My test is shorter than that, and it's the whole test.

Rent against all-in cost, using the 1% rule. In Memphis that's a 3BR at $1,395 to $1,950 on Section 8 against a house bought under $100K and rehabbed. If that test fails, paydown, tax benefits and appreciation don't save it. They just make a weak deal look better on a spreadsheet.

The one appreciation I count is forced, because I control it: buy under $100K, rehab, land at an ARV of $180K to $265K, then refi with a DSCR at 70 to 80% LTV. That gap is real the day the refi closes.

Paydown and market appreciation still happen. I count them after I own it, as a bonus — never as the reason I bought. A deal that needs three bonuses to work isn't a deal.

Jimmy Samaha · Answer

Quickest way I know for the paydown is a spreadsheet formula. In Excel or Google Sheets, CUMPRINC takes the monthly rate, number of payments, loan amount, then a start and end period. Using 1 to 12 gives you year one principal paydown in a single cell, and 13 to 24 gives year two. It returns a negative number, so flip the sign.

Just keep in mind that paydown is small in the early years of a 30 year loan and grows later, and it's equity, not cash you can spend. Leaving appreciation out unless there's a forced upside from a renovation is a conservative way to run it.

Ryan Brown · Answer

Spencer, on the tax side, we run preliminary cost segregation reports on properties we're looking at. A cost seg study breaks the purchase price into components like flooring, appliances, cabinets, site work and the building itself, so part of the property can be depreciated over a shorter period instead of all of it over 27.5 years. A preliminary report gives you a rough idea of how much depreciation you could pull forward before you pay for a full study. Since you're trying to see the true impact of each property in your portfolio, it may help you compare them.

That said, I don't weigh tax advantages too heavily when I evaluate whether a deal is a good deal. How much they're worth depends a lot on the buyer. Someone with a high income who can use the losses against other income, or who qualifies as a real estate professional, may get a lot of value out of accelerated depreciation. For someone whose rental losses are limited, much of that benefit gets suspended and carried forward, so it doesn't help much today.

So I look at the deal on its operating numbers first, then treat the tax benefit as a separate layer that depends on who's buying it. The same property can be a much better investment for one buyer than another simply because of their tax situation. I'd run those numbers with your CPA rather than build them into the base case.

Spencer Dixon · Answer

I would love that google sheet if you are able to share it. That sounds like exactly what I was looking for. I really like your approach.

I know each market is different but are there minimum bench marks, combinations, or some return on investment baselines you look for? I currently am pretty tight on my expenses which makes the cash flow opportunity very low. I admit I'm trying to turn $0 cash flow deals into deals that work because of my current market and my professional situation. I'm a realtor and small property manager. It has multiple external benefits, the more quality homes with low or even zero cash flow properties I have the better for my overall business. In my market, Madison, WI, the price points are higher and cash flow difficult. With that comes higher tenant paydown, and more tax benefits.

Thanks for your thoughtful response and eager to try out your google sheets.

Do you factor in - Mortgage Paydown, Tax Advantages & Appreciation?

Do you factor in - Mortgage Paydown, Tax Advantages & Appreciation?

Most Popular Reply

18 Replies