Financial Benefits to Owning Triangle Real Estate Investment Properties

There are basically four financial benefits to owning Triangle Real Estate Investment Properties:

1) Income by CFBT, or Cash Flow Before Taxes

2) Principal Reduction

3) Tax Savings by Depreciation

4) Appreciation

I will address each individually below.

1.  CFBT/Cash Flow Before Taxes:  To calculate the CFBT, you first need to know what your Gross Operating Income is.

Gross Operating Income (GOI) = Annual Rent (based upon the unit being 100% leased for the year), less your vacancy rate.
So if your unit leases for $1,000 per month and you historically have a vacancy rate of 5%, then your Gross Operating Income will be:

$1,000,00 x 12 months = $12,000.00
$12,000.00 x 5% = $600.00
$12,000.00 – $600.00  = $11,400.00
GOI = $11,400.00

Now that you know your GOI (Gross Operating Income), you subtract from that your Operating Expenses.  Operating Expenses can include such costs as:

  • real estate taxes
  • repairs
  • homeowner association dues
  • leasing fees
  • management fees
  • homeowner insurance
  • utilities
  • advertising
  • supplies
  • miscellaneous (anything else).

Let’s now say that your annual operating expenses will run about $5,400.00 per year.

So, you take your $11,400.00 (GOI) and subtract the $5,400.00 (Operating Expenses), you now have $6,000.00…and this is known as your Net Operating Income.

From your Net Operating Income, you will now subtract your Debt Service.  Debt Service is just a fancy term for your mortgage.  It includes your mortgage (principal and interest) over a 12 month period.

Presuming you pay $3,600.00 per year in Debt Service (that’s $300.00 per month x 12 months), you will subtract that $3,600.00 from your Net Operating Income of $6,000.00 and you now have $2,400.00.  Another term for this $2,400.00 is your Cash Flow Before Taxes.

2.  Principal Reduction:  This is the decrease in the principal amount you owe on your loan.  When you make a payment to your lender every month, part of that payment is allocated to the principal, and part of it to the interest that the lender is charging you. So therefore you are ‘paying down’ or ‘reducing’ the amount of the loan each month with each payment.

3.  Tax Savings by Depreciation:  We will get into depreciation a little more in a different blog post, but basically, you are able to write off the Personal Property Value, Building Value and Land Improvement Value of your property over ‘x’ amount of time.  The ‘x’ amount is determinant upon each category.  So with this depreciation, you SHOULD be able to save money on your taxes each year.

4)  Appreciation:  This is where the value of your real estate investment increases each year.  The percentage amount has been kinda screwy these last couple of years, but once things settle down, the appreciation of your real estate investment should equate to at least 2% annually.

 

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