What a Little Well Placed Cash Flow Can Accomplish

Posted @ 6:09 pm - Filed under 1031 Exchanges, Capital Growth, Cash Flow, Depreciation, Financing, RE investment strategies, Sominex Account

Let’s say you bought a couple smallish income properties recently. Ya put 20% down, and got a 30 year fixed rate loan for 6.25%. Between the two of ‘em you’ll be cash flowing, give or take, around $6,000 a year. The total of the two loans are are $400,000. Assuming you have an abundant Sominex Account, and you’re investing for capital growth, that cash flow is gonna just sit around collecting not much more than dust.

You know that money isn’t gonna garner anywhere near 6.25%, especially after tax, right? Right. So go all Old School on yourself. Take $500 a month and apply it equally to the principal of the two loans. Here’s what you’ll reap in say, a 5 year holding period.

First of all you’d wanna know what the loan balance would be if you just paid the payments. In this case, your balance after 60 payments would be $373,350. However, if you added the unneeded cash flow to the same 60 payments at $500 a month, your balance would be (drum roll) $338,240 — about $35,000 more in sales proceeds.

In the same time period the cash flow in your bank account would make what? 1% after tax if you were lucky? Never mind factoring in inflation. You come out ahead around $5,000 or so by paying the loan down. However, when it’s time to sell and/or tax defer exchange the properties, you’ll have made 6.25% on your cash flow while deferring any tax — which you may, in real life never hafta pay.

In my experience real estate investors often take small cash flows and simply spend it. This way they’ve made it possible to do one of two things, both of which are pretty dang cool.

First, at 20% down they’ll be able to buy roughly $175,000 more in property when they sell/exchange. In many regions that’s literally a whole extra property. Works for me.

Or they might choose door #2 which would be to apply $35,000 of unused depreciation to that part of their sales/exchange proceeds, which would give them the cash sans any taxes. Don’t know about you, but that works for me too. Of course they would’ve needed to know these options were available from Day 1 to choose, right.

That’s where Purposeful Planning comes in. To contact me call 619 889-7100. Have a good one.

This entry was posted on Tuesday, November 10th, 2009 at 6:09 pm and is filed under 1031 Exchanges, Capital Growth, Cash Flow, Depreciation, Financing, RE investment strategies, Sominex Account. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.