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All posts tagged Expenses

Recently we hosted a webinar on the topic of Building Wealth In Your 20’s & 30’s. In the third and final section of the webinar we covered building equity, tax savings and some very important closing thoughts.

For more resources and tips on how to build wealth, please contact us.

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Recently we hosted a webinar on the topic of Building Wealth In Your 20’s & 30’s. In the second section of the webinar we covered saving for retirement, the importance of life insurance and the different types of investments.

For more resources and tips on how to build wealth, please do not hesitate to contact us.

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Recently we hosted a webinar on the topic of Building Wealth In Your 20’s & 30’s. In the first section of the webinar we covered the importance of creating a budget for yourself and family, establishing personal finance goals and how to figure out, and improve on your credit.

For more resources and tips on how to build wealth, please do not hesitate to contact us. 

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Cash Flow

Cash Flow by definition is the total amount of money being transferred into and out of a business, especially as affecting liquidity. In real estate investing, what this means is:

Total Income – Total Expenses = Cash Flow

While you would assume total income would consist of just rent, make sure to include other potential sources of income including application fees, late fees and laundry income. If these sources are possible, also make sure to estimate your numbers using a conservative approach. In the long run this will be the most beneficial approach. On the flip side, your total expenses are NOT simply your mortgage, property taxes and insurance. Other expenses that cannot be overstated include utilities, potential flood insurance, repairs, vacancy, property management and capital expenditures. The last three expenses can be used as percentages against your monthly income from the property. Failure to include ALL possible expenses could lead to you purchasing a “deal” that actually turns out to be no deal at all.

Depreciation/Appreciation

Once you have purchased a property and become a landlord, it is to stay up to date with the value of your property and identify whether appreciation or depreciation has taken place. While this is very important post purchase, factoring in appreciation for an investment decision is speculative in nature and brings unneeded risk into the situation. In the event that your property has depreciated over time, there may be significant tax advantages to this and those same advantages may even be available to you if your property has appreciated over time.

Net Operating Income

Net Operating Income by definition equals all revenue from the property minus all reasonably necessary operating expenses. To look at this simply, NOI is calculated on a monthly basis using monthly income and expense data, therefore it can be converted to annual data just by multiplying by 12. The important thing to remember with NOI is that the formula does not include debt service costs, (loan costs) which differs from cash flow. One of the biggest reasons a landlord will want to know this number is because Net Operating Income plays a huge role in determining the value of your property. For this reason, it is in your best interest to work towards maximizing this number using different strategies to accomplish this.

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The Top 10 Tax Deductions For Boston Landlords

  1. Mortgage Interest Deduction – This is the largest tax deduction for most individual property owners. A portion of every mortgage payment you make goes to pay down the principal balance of the loan and another portion goes to the bank as interest. The federal government also you to deducted all interest paid to your bank associated with the mortgage. In the early years of your mortgage, interest is a very high percentage of the total payment and will become one of your largest deductions.
  2. Property Taxes – You will receive a write off for property taxes you’ve paid over the last 12 months. You’ll receive a dollar for dollar tax write for this cost.
  3. Local Water & Sewer – If you pay for water/ sewer for  your rental units, this cost is also a tax write off at 100%. If you live in the building you will not count the waster usage for you particular unit in the deduction. For example, if you own a Dorchester 3 family, live on the 1st floor and rent the other 2 units, you’d receive a tax write off for 2/3 of your total water cost.
  4. Common Area Cost – In Massachusetts, as a landlord of a multifamily building you area required to pay for lighting and other “common” area cost of your building. Hallway lighting is the most common expense that falls under this category. This is a cost of doing business for you as a landlord and is 100% tax deductible.
  5. Depreciation Expense – The government recognizes that every year your property (the asset) goes through some sort of wear and tear and slowly loses value. This loss in value (depreciation) is a tax write off for you without any outlay of cash. Most property is depreciated over a span of 29 years. You should consult your tax professional about methods for calculating depreciation.
  6. Home Office Deduction – As a landlord you are technically a business owner. As a business owner you can deduction of portion of your total home expenses as your home office. For example, if you use 1/5 of your home as an office (to run your rental business) and the total cost to operate your home is $1000 per month, you should have a total “home office” deduction of $1200. ($1000/5 = $200 * 12 months)
  7. Cost of Driving to & from your Property – There is a cost to you for driving back and forth to manage your rental property. It’s important that throughout the year you keep a log of your travel. Your accountant can assist you in calculating the exact write off provided for your time on the road.
  8. Systems & Tools of the Trade – Did you buy a snow blower, rakes, hammer, drill or other equipment you planned to use specifically for your rental property business? If so, make sure your tax person is aware of these cost as well.  It’s important to maintain a receipt log during the year.
  9. Credit Card Interest – It’s always a good idea to keep a separate bank account you use strictly for your rental business. This separate bank account allows you to easily keep track (come year end) of what you spent. You should also keep a separate credit card for your apartments as well. The interest the credit card company charges you is also a tax write off.
  10. Property Management Cost – Did you pay a property management company to handle your apartment rentals this year? If so, the company will be able to provide you with the total you’ve paid them in the last 12 months. Also provide this figure to your tax-preparer.

To learn more about the ins and outs of landlord tax deductions, I highly recommend NOLO’s “Every Landlords Tax Deduction Guide”. Click the image below to learn more!

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Are you an investor or are you in the business of speculation? Investors typically look for a cash flow return on their investment based on a sound cash flow analysis. They purchase a property when the projected ROI make sense compared to other investment options. Buying a property with little to no cash flows and hopes of appreciation is called “speculating”. There are no financial predictions, but rather a hope that the market will continue to rise and you will make a financial gain the in the future. There are two main problems with type of investing which are as follows.

1. What happens when the market goes south? If the economy tanks and your property values decrease will you be forced to sell at a loss? An investor with a cash flowing investment isn’t affected as much by down turns in the market. Despite a loss in value, the investor is still putting cash in her pocket every month when their tenants pay rent.

2. What happens when the property needs repairs? If you’re investment isn’t putting cash in your pocket and you need a new roof where are those funds coming from? You’ll now be forced to dip into your personal funds and make a further investment into the property rather than the investment taking care of itself.

Want to know how to evaluate rental property in Boston? Watch the video above and download our Cash Flow Analysis. If you have questions about the form or the video, please give us a call at 617-297-8641 or email us at contact@mandrellco.com

Download the Cash Flow Analysis here!

 

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