Bookkeeping and Cash Flow Questions

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Bookkeeping and Cash Flow Questions

Dean ValadezPro Member
Investor · Member since 2023 · 64 posts · 11 votes

Bookkeeping questions:

I purchased a property with cash flow, according to my calculator, on day 1, but knew it was a value-add opportunity. Since the acquisition, I have done upgrades. Technically, I know that with the upgrades, I am putting money into the property and any cash flow is already used up before I even receive the rent. About 6 months worth of cash flow was negated by the upgrades. More so when I do more upgrades. My questions are:

1.) Are the anticipated upgrades counted as 'renovation' costs in my calculator, thus the property still cash flows, but the COCR takes a hit, or

2.) Do I not have cash flow for those first 6 + months?

If 1.), then do I still pay myself the cash flow amount, simply to put it back into the bank account to pay for the upgrades? That just seems like shuffling money around. Does that have a positive or negative tax implication? If I do pay myself, then when I need the money again to pay for upgrades and I transfer money from my personal back to my business, does that pierce the corporate veil (I have an LLC set up)?

If 2.), I assume I just don't pay myself?

Since I am a newbie to this, I am curious as to how normal this situation is, with value-add properties and putting money into the property. A few local investors I talk to say it is normal (for them), but I am looking for other input as well. 

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Jamie Banks
Real Estate Consultant · Reston, VA · Member since 2022 · 513 posts · 521 votes
2y

I would recommend using a real estate bookkeeping software that will help you with a lot of these questions. Baselane is the software I use because it's created for real estate investors. When you categorize each transaction using the software you can then create statements to understand your monthly or even yearly cash flow. 

I personally reserve 15% of my rent per month for maintenance, capex, and vacancy. The cash flow left over after reserves, my mortgage, and other expenses is the cash flow that I "pay" myself / my business. 

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  • Dean ValadezPro Member
    OP
    Investor · Member since 2023 · 64 posts · 11 votes
    2y
    Quote from @Evan Polaski:

    @Dean Valadez, it sounds like you are probably trying to combine a lot of different things into one.

    From a technical accounting standpoint, it seems like you are trying to combine some form of Income Statement and Statement of Cash Flows.  Your net operating income is positive, from what you outline, since capital improvements are not commonly an income statement item.  

    Your cash flow is literally that, the flow of all cash in and out over a period of time.  If you are flowing more money OUT than in, then you do not have positive cash flow for that period of time.  But you have positive net operating income.  

    Assuming this is a rental owned by you alone, while I know you want to understand things, in practice it really doesn't matter.  This is a small business.  Sometimes you will be able to pull money out of the business to spend, or reinvest, or whatever the case may be, and sometimes you will need to pump money into the business. Sometimes the "business" will need money invested that you didn't plan for, and you have to tap into savings accounts to keep it afloat.  

    To answer your initial question, both 1 and 2 are accurate.  Your cash on cash return is going to be low, as you have no cash flow to distribute/keep.  And for the same reason, you have negative cash flow.  These are not two separate things, all the numbers work together.


     Ha! I probably am and don't even know it. Right now, I am just using a P&L spreadsheet and looking at my original cash flow calculator used to originally make the decision to purchase. Do you suggest I make an Income Statement spreadsheet and a Statement of Cash Flows? My accountant never recommended it thus I am not sure. Your tips are appreciated!

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  • Evan Polaski
    Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes
    2y

    @Dean Valadez, do I recommend YOU make your own financial statements?  Generally, no.  Your accountant can be doing that.  But again, it is likely not necessary if you just own one property.  But I will add one more thing to this:

    If you have an amortizing mortgage, the difference between and interconnections of the three main financial statements is important.  Each month, you pay your mortgage (principle and interest).  Some of that payment is principle and some of it is interest.  For simplicity, let's say your payment is $750/mo (P&I), with $600 being interest each month and $150 being principle repayment.  

    Each month $600 hits your P&L (income statement) as interest expense.  Does that mean you have that $150/mo to pay yourself?  It isn't an expense on your income statement?  

    But it is also a cash outflow.  So the principle repayment each month hits your statement of cash flows, AND your balance sheet, since it is additional equity in the deal each month.  And the most fun part: there is an instance where you could, theoretically at least, have $0 or negative cash flow on a property and still OWE taxes at the end of the year, because of the this principle repayment not being tax deductible, only your interest expense.

    At the end of the day, you can choose how you look at it.  There is no real universal way to do this.  I would simply pick how you want to look at it, and then assess all deals in the same way, so you have apples to apples comparison.

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  • Simon W.Business Member
    Real Estate Consultant · Lehigh Valley PA & New York City · Member since 2013 · 1k+ posts · 657 votes
    2y

    Not really recommended to use a spreadsheet to create these financial reports because human errors can happen when entering formulas.

    I mean you can do it, but it just baffles me that people are okay spending time doing accounting work without any knowledge/experience instead of delegating the work when there are people who go to colleges and graduate with accounting degree. Are you okay creating legal documents on your own without a lawyer/attorney and just asking advices on a forum? Or creating medicines without any chemistry knowledge? I get that a lot of things can be done by searching the internet, but wouldn't the best way to use your time is to focus on real estate investing and not real estate accounting?

    Your CPA should be able to help out on all of those things you asking about. If not, it is time to seek out a different accountant that focuses in real estate

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