Too bad real estate didn’t come with little game cards that told you what would happen in the future and what your cash flow, expenses and appreciation would be.
Back in the go-go years of real estate, a married couples, both medical professionals, came into my office. They were so proud of themselves because they had taken the first step out of the rat race by buying their first real estate investment.
They had a simple problem, though. They couldn’t seem to figure out how to calculate the cash on cash return. (This is calculated by dividing the average net cash flow by the total cash investment.)
“We keep coming up with a negative number!” they exclaimed.
And, that, I explained, was because the property had a negative cash flow.
I remember that moment as a defining one because soon after the real estate market just exploded with growth. You could sell anything as long as it had real estate in the name and could accept a check now.
And if you wanted to buy, you better be prepared to grab fast because it won’t be there for long.
And then, the gradual chinks started showing. Houses started taking longer and longer to close. Banks quit lending money. Defaults increased. And then the bad reports were more than the good reports and we entered a real estate recession.
And here we are.
Cash flow is the key component of real estate success. Don’t count on appreciation to bail you out. Expect to get turned down at least 5 times before you get a loan, even with a big down payment and stellar credit.
And, in my arena, boy, have the tax traps increased.
This week, we’re going to highlight four of them:
Tuesday: Problems with Rent to Own Contracts
The real estate seminar goo roos are starting up again. Look out if you live in states like Texas or New York! Learn more on Tuesday.
Wednesday: The IRS’s Dirty Little Trick on Real Estate Investors – Material Participation Rules
You might have heard about the benefit of real estate paper losses. Before you take advantage of them, though, make sure you’ve got the facts straight on material participation.
Thursday: Tax Issues With Walking Away From a Rental Property
Are you looking at an upside down real estate rental that is eating you alive in payments?
Friday: Investor or Business Owner? The Right Structure Makes a Difference!
When it comes to taxes, there’s a big tax difference between a real estate investor and a real estate business owner.
Make sure you check back daily!
Tags: cash flow • diane kennedy • Diane Kennedy CPA • real estate • real estate business owner • real estate cash flow • real estate investor • ustaxaid • UStaxaid.com
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- IRS Strikes Gold with Real Estate Professional Audits
- IRS Penalizes Real Estate Developers
On August 16th, 2010 | 8:32 am
Real Estate and Homes for Sale Information said:
[...] the rest of this great post here Comments (0) Posted in Homes For Sale [...]
On August 31st, 2010 | 8:16 am
realbench said:
I personally like the cash on cash return calculation because it helps me measure the return on cash invested in an investment. Thus allowing me easily to compare against other non-real estate investments to see if my money is better employed someplace else. Your post gives me another angle on how to employ it more efficiently.
Good post
On October 26th, 2010 | 12:25 am
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