Landlords - Negative Cashflow but Making a Profit.

3DataModem

Regina Most Applesauce wrote: »

You aren’t really thinking this through are you? The inheritance tax bill is as much a cost to the business as if they bought the property for renting. If you buy a property to rent you damn well want to make sure to cover the cost of it (and get profit) from the rent. If you inherit it’s no different part of the cost of your business is paying the tax bill and you should aim to pay it from the rental business.

I think the problem stems from some lords thinking "cover the cost" means cashflow positive week-to-week.

If the amount you are subsidising your investment by each month is lower than the amount that is coming off the mortgage balance, then you are "covering the cost" but cashflow negative.

3DataModem

3DataModem wrote: »

I think the problem stems from some lords thinking "cover the cost" means cashflow positive week-to-week.

If the amount you are subsidising your investment by each month is lower than the amount that is coming off the mortgage balance, then you are "covering the cost" but cashflow negative.

If any money is leaving your account to support the rented property then you are not "covering the cost" imo. It has to wipe its own arse like any side business, ideally be bringing in extra income if its being run correctly and planned well from the outset.

3DataModem

Regina Most Applesauce wrote: »

If any money is leaving your account to support the rented property then you are not "covering the cost" imo..

If the mortgage is reducing by more than the money leaving your account, then you are making money, even if the property is not changing in value. That's not an opinion, just maths.

Of course it is preferable for a property to "wash its face" from a cashflow perspective, but that's not the reality for the majority of taxpaying small landlords.

JJJackal

LeineGlas wrote: »

You're saying landlords should refuse to rent with a tenant who had a dispute with a previous landlord?

Cool.

A tenant with a 20k award as a result of an "illegal" eviction triggered by the tenant not paying rent I believe is what he is referring too.

Not a dispute over the dryer

Ray Palmer

3DataModem wrote: »

If the mortgage is reducing by more than the money leaving your account, then you are making money, even if the property is not changing in value. That's not an opinion, just maths.

Of course it is preferable for a property to "wash its face" from a cashflow perspective, but that's not the reality for the majority of taxpaying small landlords.

Yes that is simple maths. It is not accounting. By the same measure if a shop bought a premises with a loan and was not making a positive cash flow you would say they are making money by reducing the loan.an accountant wouldn't see it that way.

Nobody is buying property expecting it to be in negative cash flow the entire length of the mortgage. It just wouldn't make for good practice. Expecting landlords to only see a return at the end of the mortgage is not sustainable. The country needs landlords

dubrov

Ray Palmer wrote:

Yes that is simple maths. It is not accounting. By the same measure if a shop bought a premises with a loan and was not making a positive cash flow you would say they are making money by reducing the loan.an accountant wouldn't see it that way.

Of course an accountant would see it the same way. Profit is profit whether it comes from receiving cash or paying down a mortgage balance.

Of course, in the short term cashflow is very important to a business and in many cases can make them go under.

Ray Palmer

dubrov wrote: »

Of course an accountant would see it the same way. Profit is profit whether it comes from receiving cash or paying down a mortgage balance.

Of course, in the short term cashflow is very important to a business and in many cases can make them go under.

Having worked on accounting systems for 20 odd years I can assure you that is not the case. If you have to keep pumping money into a business it is not making a profit as the overheads are higher than income you are losing money. Capital and appreciation are not what you include in profit and loss because you cannot realise it without closing the business. You would have to restructure the company.

Simple maths is not equivalent to accounting.

Graham

Assets would appear on the balance sheet.

Plenty of profitable businesses fail because of lack of cashflow. A business doesn't need to have positive cashflow to be profitable, it probably does need a positive cashflow to survive.

Ray Palmer

Graham wrote: »

Assets would appear on the balance sheet.

Plenty of profitable businesses fail because of lack of cashflow. A business doesn't need to have positive cashflow to be profitable, it probably does need a positive cashflow to survive.

Yes it is recorded but not on profit and loss. The fact they treat rental properties doesn't change how accountants view profit and loss.

Look at Cleary's, the company was making money. It wouldn't be making money if it had to pay the market rate for the location. They restructured the company to show it was under utilising the property.

Accountancy is not simple maths and to say a landlord is making money is false when proper accounting is used. You work as a landlord and pay money in while slowly paying off the mortgage is not profit. You are constantly investing in capital to finally own it.

dubrov

Ray Palmer wrote: »

Having worked on accounting systems for 20 odd years I can assure you that is not the case. If you have to keep pumping money into a business it is not making a profit as the overheads are higher than income you are losing money. Capital and appreciation are not what you include in profit and loss because you cannot realise it without closing the business. You would have to restructure the company.

Simple maths is not equivalent to accounting.

I didn't mention capital appreciation as that isn't really quantifiable until it is realised (e.g. by selling). I was talking about a reduction is mortgage debt. Are you saying an accountant would not record a mortgage debt reduction in the P&L account?

It doesn't matter anyway as real profit is what matters, not an accountant's version.

I think we are all agreed on cashflow being very important to some businesses/landlords.

steddyeddy

Regina Most Applesauce wrote: »

If any money is leaving your account to support the rented property then you are not "covering the cost" imo. It has to wipe its own arse like any side business, ideally be bringing in extra income if its being run correctly and planned well from the outset.

Is money to pay off a mortgage paying business costs or paying for an asset?

meijin

steddyeddy wrote: »

Is money to pay off a mortgage paying business costs or paying for an asset?

and that's how every thread which mentions profitability of renting ends :rolleyes:

- some people argue that negative cashflow is a loss
- some people argue that paying off capital is not a loss

THE END. :cool:

Graham

steddyeddy wrote: »

Is money to pay off a mortgage paying business costs or paying for an asset?

It's paying for an asset. Vocal opinions usually fall into one of two camps

a) landlords shouldn't make a penny until the mortgage is cleared
b) landlords should have positive cashflow from day 1

The reality is somewhere between those two extremes.

DubCount

Its just too easy to ignore the impact of negative cash flow on a landlord's finances. The capital repayments on a mortgage is like an enforced savings scheme - yes you end up with an asset at the end of the mortgage, but that's little comfort if you are struggling to find the cash to make the mortgage repayments. This is why interest only mortgages for buy2let make sense to everyone but Irish banks (assuming a decent LTV to start off with).

The Student

dubrov wrote: »

I didn't mention capital appreciation as that isn't really quantifiable until it is realised (e.g. by selling). I was talking about a reduction is mortgage debt. Are you saying an accountant would not record a mortgage debt reduction in the P&L account?

It doesn't matter anyway as real profit is what matters, not an accountant's version.

I think we are all agreed on cashflow being very important to some businesses/landlords.

You record any mortgage interest payment as an expense in the P&l which can lead to a loss in a given year.

You can make a paper profit and still have a negative cashflow.

If you sell a property for more than its carrying amount in your accounts then you make a profit on the sale and pay tax accordingly.

steddyeddy

Graham wrote: »

It's paying for an asset. Vocal opinions usually fall into one of two camps

a) landlords shouldn't make a penny until the mortgage is cleared
b) landlords should have positive cashflow from day 1

The reality is somewhere between those two extremes.

But the mistake people (including landlords) are making is to argue this in terms of a single business model. Saying landlords are (insert opinion on profitability here), is like saying "car hire businesses (mentioned because it's renting an asset) are all profitable/unprofitable ect.

It's a fact that many times on here we see that the method by which the landlord obtains the asset is a major (primary maybe) determinant of whether that business is profitable.

Buy to let, inheritance, accidental landlord or cash purchase of assets are all completely different. Some of those should of course be in profit, but people often forget that bad investments (bad deal on buy to let) are not going to be profitable.

The Student

Graham wrote: »

It's paying for an asset. Vocal opinions usually fall into one of two camps

a) landlords shouldn't make a penny until the mortgage is cleared
b) landlords should have positive cashflow from day 1

The reality is somewhere between those two extremes.

It is only paying for an asset if all of youryour outlays are less than your income be it by rent or capital appreciation.

Timing is the key, if you sell at the wrong time you may end up making no profit at all.

Look at those who bought at the height of the boom on interest only mortgages then the bottom fell out of the rental market. Some of these people are only now getting out of negative equity and are selling up.

dubrov

The Student wrote:

You record any mortgage interest payment as an expense in the P&l which can lead to a loss in a given year.

I think you answered the question you wanted to here.

Surely the outstanding mortgage amount goes down as a liability. Paying down this liability should most certainly hit the profit and loss account.

Rental returns pre-covid were running about 8% in Dublin. If you factor in expenses and the top rate of income tax, no new landlord paying a 20% deposit would be generating cashflow month to month.

The Student

dubrov wrote: »

I think you answered the question you wanted to here.

Surely the outstanding mortgage amount goes down as a liability. Paying down this liability should most certainly hit the profit and loss account.

Rental returns pre-covid were running about 8% in Dublin. If you factor in expenses and the top rate of income tax, no new landlord paying a 20% deposit would be generating cashflow month to month.

No your liability in company accounts is carried in your balance sheet as a non current liability. Your asset is carried at historical cost unless you revalue it.

Your p & l is only a record for a given period and you can only charge interest payments not capital.

This is why landlords are treated differently to other businesses.

dubrov

The Student wrote:

No your liability in company accounts is carried in your balance sheet as a non current liability. Your asset is carried at historical cost unless you revalue it.

I understand the above. It is irrelevant to my question. This is not about assets.

The Student wrote:

Your p & l is only a record for a given period and you can only charge interest payments not capital.

Again, I am talking about debt, or non current liability as you reference above. Surely a reduction in non current liability over a period would be recorded as a profit.

The Student wrote:

This is why landlords are treated differently to other businesses.

I've lost you here

steddyeddy

DubCount wrote: »

Its just too easy to ignore the impact of negative cash flow on a landlord's finances. The capital repayments on a mortgage is like an enforced savings scheme - yes you end up with an asset at the end of the mortgage, but that's little comfort if you are struggling to find the cash to make the mortgage repayments. This is why interest only mortgages for buy2let make sense to everyone but Irish banks (assuming a decent LTV to start off with).

But should every rental business make a profit all of the time? Some investments are just terrible investments and won't make a profit. Some buy to let for example. Those sort of mortgages aren't conducive to making a profit.

The Student

dubrov wrote: »

I understand the above. It is irrelevant to my question. This is not about assets.



Again, I am talking about debt, or non current liability as you reference above. Surely a reduction in non current liability over a period would be recorded as a profit.



I've lost you here

You only record a profit when you sell an item. If you are paying down a mortgage you are not making a profit until you realise the asset. Eg you sell iNormal business will depreciate an buildings over 20/50 yrs.

You charge this as an expense to your p & l resulting in the business owning the building outright. Then when the business sells the building it pays ,tax on the sales value as it has received tax relief on its cost via the yearly depreciation charge

Irish revenue do not allow landlords charge for depreciation each year. They allow interest as an expense not capital.

Any reduction in debt is just recorded as retained earnings in your balance sheet. It is only a paper profit.

You only make a cash profit when you sell when all costs incurred have been paid.

Marcusm

dubrov wrote: »

I think you answered the question you wanted to here.

Surely the outstanding mortgage amount goes down as a liability. Paying down this liability should most certainly hit the profit and loss account.

Rental returns pre-covid were running about 8% in Dublin. If you factor in expenses and the top rate of income tax, no new landlord paying a 20% deposit would be generating cashflow month to month.

Paying down the mortgage debt capital absolutely has no impact on any conventional profits &loss account or income statement. Paying off debt incurred to purchase a capital asset has no income effect other than to avoid penalties or additional interest costs.

Marcusm

The Student wrote: »

No your liability in company accounts is carried in your balance sheet as a non current liability. Your asset is carried at historical cost unless you revalue it.

Your p & l is only a record for a given period and you can only charge interest payments not capital.

This is why landlords are treated differently to other businesses.

Landlord are not treated differently to other businesses!

dubrov

The Student wrote:

Any reduction in debt is just recorded as retained earnings in your balance sheet. It is only a paper profit.

Finally you answer the question asked

Marcusm

The Student wrote: »

You only record a profit when you sell an item. If you are paying down a mortgage you are not making a profit until you realise the asset. Eg you sell iNormal business will depreciate an buildings over 20/50 yrs.

You charge this as an expense to your p & l resulting in the business owning the building outright. Then when the business sells the building it pays ,tax on the sales value as it has received tax relief on its cost via the yearly depreciation charge

Irish revenue do not allow landlords charge for depreciation each year. They allow interest as an expense not capital.

Any reduction in debt is just recorded as retained earnings in your balance sheet. It is only a paper profit.

You only make a cash profit when you sell when all costs incurred have been paid.

A reduction in debt is not any type of “paper profit”, and it is not reflected in retained earnings. it is merely the discharge of a liability

Marcusm

dubrov wrote: »

Finally you answer the question asked

The statement you quoted, however, is entirely incorrect and you should not rely on it in any way.

The Student

Marcusm wrote: »

A reduction in debt is not any type of “paper profit”, and it is not reflected in retained earnings. it is merely the discharge of a liability

Ok then explain how you balance your balance sheet. If your liabilities have decreased then your retained earnings must increase to balance your balance sheet.

This is not cash it is an accounting transaction to give a notional value to the increase in your capital appreciation.

Only when you actually sell the asset will you know exactly what your cash value/profit is.

dubrov

Maybe a quick example might help

At start of period
Asset purchased with value of 500k with 100k deposit
=> Mortgage liability = 400k
Cash Position = 15k

At end of period
Asset value = Unknown
Rental income for period = 8k
Expenses (including interest) = 1k
Mortgage liability = 390k
Cash position = 15 + 8 - 1 + (390-400) = 12k

I know what the real profit is.
What would the accounting P&L be reported for this period?

Marcusm

The Student wrote: »

Ok then explain how you balance your balance sheet. If your liabilities have decreased then your retained earnings must increase to balance your balance sheet.

This is not cash it is an accounting transaction to give a notional value to the increase in your capital appreciation.

Only when you actually sell the asset will you know exactly what your cash value/profit is.

It is the receipt of the cash as rent which increases retained earnings. Whether that cash is held as cash or used to discharge debt does not impact on earnings. There is no causative relationship between the discharge of debt and earnings. There is a causative relationship between rent and earnings!

Marcusm

dubrov wrote: »

Maybe a quick example might help

At start of period
Asset purchased with value of 500k with 100k deposit
=> Mortgage liability = 400k
Cash Position = 15k

At end of period
Asset value = Unknown
Rental income for period = 8k
Expenses (including interest) = 1k
Mortgage liability = 390k
Cash position = 15 + 8 - 1 + (390-400) = 12k

I know what the real profit is.
What would the accounting P&L be reported for this period?

Income 8k
Expense. 1k

Profit (I-E) 7k

The Student

Marcusm wrote: »

It is the receipt of the cash as rent which increases retained earnings. Whether that cash is held as cash or used to discharge debt does not impact on earnings. There is no causative relationship between the discharge of debt and earnings. There is a causative relationship between rent and earnings!

If you are reducing you non current liability you have to balance your balance sheet. Retained earning are previous years profits that were not shared as dividends to shareholders.

If you make a loss in a given year via your p & l and you still give a dividend you use your retained earnings to pay the dividend

dubrov

I'll let you guys argue the accounts that are debited/credited.

However, you have shown that a landlord with negative cashflow can still make a profit in the accounting and real world which was the original point.

Marcusm

The Student wrote: »

If you are reducing you non current liability you have to balance your balance sheet. Retained earning are previous years profits that were not shared as dividends to shareholders.

If you make a loss in a given year via your p & l and you still give a dividend you use your retained earnings to pay the dividend

You use an asset (cash) to reduce a liability (debt). This has no impact on earnings.

You earn income and it increases both your assets (cash or receivables) and your retained profits.

Eric Cartman

3DataModem wrote: »

If the mortgage is reducing by more than the money leaving your account, then you are making money, even if the property is not changing in value. That's not an opinion, just maths.

Of course it is preferable for a property to "wash its face" from a cashflow perspective, but that's not the reality for the majority of taxpaying small landlords.

in theory yes, but you've no idea how far along a landlord is, if it was month 1 of year 1 of the mortgage, rent would have to be basically twice the mortgage payment for the landlord to make a cent. as time goes on the profit grows but in general rent has to be twice what a mortgage payment is to let the landlord turn any profit.

if the rent (after tax) can't cover the full payment id consider it a bit of a raw deal though. People get in to property for the same reason they invest in fast food franchises, petrol stations etc... money now. If everyone wanted to wait we'd have acres of olive groves and apple trees.

dubrov

Eric Cartman wrote:

if the rent (after tax) can't cover the full payment id consider it a bit of a raw deal though. People get in to property for the same reason they invest in fast food franchises, petrol stations etc... money now. If everyone wanted to wait we'd have acres of olive groves and apple trees.

You only get taxed on profits. No profit means no tax.

To make a profit, the rent (income) has to be greater than expenses. Only the interest part of the mortgage payment is an expense.

Ray Palmer

dubrov wrote: »

I'll let you guys argue the accounts that are debited/credited.

However, you have shown that a landlord with negative cashflow can still make a profit in the accounting and real world which was the original point.

No you haven't proved that. You areihnoring accounting principles.

No mention of costs to selling to say when in your vision of "profit" happens.

If the property loses value and in negative equity you are saying they are in "profit"

A positive balance sheet does not mean profit.

This is where you are going wrong by harping on about a positive being profit. Profit in business has definition and you want to change the definition to a simplistic common language. People use many words in common use that do not mean the same thing in correct context. The same way people misuse the theory of evolution to say it isn't true and just a "theory" . That is what you are doing here.

dubrov

Ray Palmer wrote: »

No you haven't proved that. You areihnoring accounting principles.

No mention of costs to selling to say when in your vision of "profit" happens.

If the property loses value and in negative equity you are saying they are in "profit"

A positive balance sheet does not mean profit.

This is where you are going wrong by harping on about a positive being profit. Profit in business has definition and you want to change the definition to a simplistic common language. People use many words in common use that do not mean the same thing in correct context. The same way people misuse the theory of evolution to say it isn't true and just a "theory" . That is what you are doing here.

In fairness, it has been stated several times on this thread that the accounting profit due to asset depreciation/appreciation is not realised until the asset is revalued or disposed of. As a landlord there is no incentive to revalue until the property is sold as capital gains tax would apply. In general properties appreciate in value so this would add to the overall profit.

Are you arguing that profit for a period is not equal to income less expenses?
Income is based on rental income and expenses include upkeep and interest.

Some/all of that income is used to pay down the mortgage debt and although that transaction doesn't create a profit (cash decreases and debt decreases), that reduction in debt is where most of the profit ends up.

Eric Cartman

dubrov wrote: »

You only get taxed on profits. No profit means no tax.

To make a profit, the rent (income) has to be greater than expenses. Only the interest part of the mortgage payment is an expense.

In other sensible countries the whole payment is ore tax which would allow landlords to reduce rents considerably overnight while still making profits, with our current system landlords neet to charge far too much to break even (cashflow) year to year. As many landlords are retirees, they have no other source of income to ‘break even’ on paying 0 off the capital.

And before the usual suspects ‘BuT LaNdLoRdS R AlL GrEeDy N wUlDnT DrOp ThE ReNt’ , they would , its just too expensive to do so at present.

Marcusm

Eric Cartman wrote: »

In other sensible countries the whole payment is ore tax which would allow landlords to reduce rents considerably overnight while still making profits, with our current system landlords neet to charge far too much to break even (cashflow) year to year. As many landlords are retirees, they have no other source of income to ‘break even’ on paying 0 off the capital.

And before the usual suspects ‘BuT LaNdLoRdS R AlL GrEeDy N wUlDnT DrOp ThE ReNt’ , they would , its just too expensive to do so at present.

Please let me know which countries these might be which give a tax deduction for the capital repayment of a loan.

The Student

Marcusm wrote: »

Please let me know which countries these might be which give a tax deduction for the capital repayment of a loan.

This is your depreciation charge on buildings in company accounts.

Marcusm

The Student wrote: »

This is your depreciation charge on buildings in company accounts.

That is a non-sequitur as it is unrelated to whether or not it was acquired by borrowings or not. More importantly, please let me know which jurisdictions give tax relief for depreciation charges in accounts for (1) all buildings and (2) residential properties.

The Student

Marcusm wrote: »

That is a non-sequitur as it is unrelated to whether or not it was acquired by borrowings or not. More importantly, please let me know which jurisdictions give tax relief for depreciation charges in accounts for (1) all buildings and (2) residential properties.

A depreciation charge is an expense in your p & l which like all other expenses are deducted from gross profit to arrive at net profit. You pay tax on net profit ergo you have not paid tax on the depreciation charge. Only when you come to dispose of company buildings do you pay tax on the sale value. Have a look at a set of company accounts bal sheet and you will see the buildings carrying amount and the yearly and accumulated depreciation charge.

A landlord is not allowed depreciate a property through his p & l and can only expense interest through the p & l.

Marcusm

Marcusm wrote: »

Landlord are not treated differently to other businesses!

They are, they cannot write half the things that other business get away with and more so they are scrutinised far more for what they do claim.

The Student

dubrov wrote: »

In fairness, it has been stated several times on this thread that the accounting profit due to asset depreciation/appreciation is not realised until the asset is revalued or disposed of. As a landlord there is no incentive to revalue until the property is sold as capital gains tax would apply. In general properties appreciate in value so this would add to the overall profit.

Are you arguing that profit for a period is not equal to income less expenses?
Income is based on rental income and expenses include upkeep and interest.

Some/all of that income is used to pay down the mortgage debt and although that transaction doesn't create a profit (cash decreases and debt decreases), that reduction in debt is where most of the profit ends up.

Actually a number of years profit can be wiped out if a property is in negative equity to a greater amount than the net profit earned for all periods of ownership.IE if you have to make up the negative equity shortfall then you have made an overall loss.

davindub

The Student wrote: »

A depreciation charge is an expense in your p & l which like all other expenses are deducted from gross profit to arrive at net profit. You pay tax on net profit ergo you have not paid tax on the depreciation charge. Only when you come to dispose of company buildings do you pay tax on the sale value. Have a look at a set of company accounts bal sheet and you will see the buildings carrying amount and the yearly and accumulated depreciation charge.

A landlord is not allowed depreciate a property through his p & l and can only expense interest through the p & l.

Generally only industrial type buildings are depreciated.

And depreciation is added back before calculating corporate or personal tax. You can claim capital allowances on industrial buildings but if you sell for greater than the tax written down value, there is a balancing charge (i.e. capital allowances reversed). Which would happen in the majority of cases where residential property is concerned.

Marcusm

The Student wrote: »

A depreciation charge is an expense in your p & l which like all other expenses are deducted from gross profit to arrive at net profit. You pay tax on net profit ergo you have not paid tax on the depreciation charge. Only when you come to dispose of company buildings do you pay tax on the sale value. Have a look at a set of company accounts bal sheet and you will see the buildings carrying amount and the yearly and accumulated depreciation charge.

A landlord is not allowed depreciate a property through his p & l and can only expense interest through the p & l.

Most countries tax systems do not permit the deduction of accounting depreciation but have a separate system of tax depreciation; Ireland calls it capital allowances. In most cases there are limited opportunities for tax depreciation on buildings and very rarely for residential properties. Ireland had a limited scope system for this in urban renewal relief areas, seaside resorts etc.

Irrespective, it is still not the granting of a deduction for the writing off of the capital element of loan repayments.

Marcusm

Regina Most Applesauce wrote: »

They are, they cannot write half the things that other business get away with and more so they are scrutinised far more for what they do claim.

Can you provide some specifics as to what these things might be which other businesses can write off? The tax charge on rents is on the profits or gains arising in a year and is computed on the same basis as any trading business. Revenue expenses which are incurred In the business of letting (section 97 TCA 1997).

Eric Cartman

Regina Most Applesauce wrote: »

They are, they cannot write half the things that other business get away with and more so they are scrutinised far more for what they do claim.

This, being s residential landlord in Ireland has almost none of the advantages that a normal business runs or even a residential landlord (wrapped in a company) receives in other countries.

dubrov

Eric Cartman wrote:

This, being s residential landlord in Ireland has almost none of the advantages that a normal business runs or even a residential landlord (wrapped in a company) receives in other countries.

Can you give an example of how a landlord has a disadvantage versus s normal business?

Marcusm

Marcusm wrote: »

Can you provide some specifics as to what these things might be which other businesses can write off? The tax charge on rents is on the profits or gains arising in a year and is cjomputed on the same basis as any trading business. Revenue expenses which are incurred In the business of letting (section 97 TCA 1997).

Just take one example. How many small 1/2 property LL are claiming capital expenses on their car or writing off a portion of all motoring expenses (tyres, servicing etc) against their overall tax bill?

Almost none and if they were they would be gone though with a fine tooth comb. Most other small business, particularly say farmers etc would be claiming up to 70% of their car against business use and it might never do a single thing related to the farm but it’s standard and accepted. I see this from personal experience so I know this is what happens.