do you include down payment when analyzing for cash flow?

Question

Hello!

Many of the books (the millioniare real estate investor) and posts on BP I read, seem to not include the down payment when evaluating a deal to see if it cash flows.

Is the down payment included in the evaluation, or is the down payment considered your "buy in" and excluded from the evaluation?

I'm doing evaluations based on bank financing, with 20% down.

Thanks for your input!

John Leavelle · Answer

Howdy @Tiffany Ralston

From a simple point of view as a Buy and Hold investor their are 2 key analysis that you may look at.  Cash Flow and Cash on Cash Return.

Cash Flow is just all Income from the property minus Vacancy, Expenses, and Debt Service.

Cash on Cash Return is the Pre-Tax annual Cash Flow dividend by the Actual Cash Invested (including Down payment, Closing costs, and any Rehab cost).  It is expressed as a percentage.

Joe Villeneuve · Answer

Down payment impact the CoC Return analysis, which is kind of the Cash Flow for the 1st year (only).

Thomas S. · Answer

You may choose to analyse your cash flow in two separate ways. I calculate cash flow based on 100% financing. This allocates a expense on your cash equilivant to the prevailing mortgage interest rates. Alternately as a investors aware of th evalue of your money you could allocate a return on your DB at say 10% which equates to youe chosen opportunity value on your cash.

Ibn Abney · Answer

@Tiffany Ralston Cash on Cash includes the down payment, but I believe it should be isolated and measured on its own.

I use the break-even formula. I look to break even in 2-3 yrs from purchase (get my down payment back).

BE= (Down payment + closing cost+rehab)/monthly net cash flow

Tiffany Ralston · Answer

Thanks for the explanations! I've always analyzed including the down payment, but often wondered if I was an outlier...thanks again!

Andrew B. · Answer

Cash flow is the cash left after accounting for all expenses (real and accrued). Your down payment comes into play when calculating the return on your investment.

JD Martin · Answer

I ultimately consider cash flow on whether or not it will cash flow with all of *my* money pulled from the property, whether I do it or not. So if I buy a property for $50k cash and put $20k into it, and it's worth $100k, and I pull 75% LTV, leaving none of *my* money behind, it still needs to cash flow around $200+ per month including the mortgage.

Those are my numbers and my area. You might find something else works in your area. Also, cash flow is not your cash on cash return rate. Something might cash flow very well but give you a (relatively) poor rate of return on your cash. You see this a lot in expensive areas like San Francisco and NYC.

Alexander Felice · Answer

What you're referring to, in economics is called 'sunk cost' it's a cost associated with an investment where the money has already been spent and should no longer by accounted for. However, this only applies when looking at a previous investment where the cash input is already gone by the time you analyze.

Since this is not the case with your home purchase: you intend to analyze the deal before any capital investment, you will consider and account for all cash outlay, including your downpayment in you analysis.

do you include down payment when analyzing for cash flow?

Most Popular Reply