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Landlords - Negative Cashflow but Making a Profit.

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  • 02-06-2020 9:06am
    #1
    3DataModem
    Registered Users Posts: 3,943 ✭✭✭


    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.


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    #2
    [Deleted User]
    Posts: 0 ✭ [Deleted User]


    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.


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    #3
    3DataModem
    Registered Users Posts: 3,943 ✭✭✭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.


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    #4
    JJJackal
    Registered Users Posts: 1,016 ✭✭✭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


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    #5
    Ray Palmer
    Registered Users Posts: 8,351 ✭✭✭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


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    #6
    dubrov
    Registered Users Posts: 3,546 ✭✭✭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.


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    #7
    Ray Palmer
    Registered Users Posts: 8,351 ✭✭✭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.


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    #8
    Graham
    Moderators, Society & Culture Moderators Posts: 17,642 Mod ✭✭✭✭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.


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    #9
    Ray Palmer
    Registered Users Posts: 8,351 ✭✭✭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.


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    #10
    dubrov
    Registered Users Posts: 3,546 ✭✭✭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.


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    #11
    steddyeddy
    Registered Users Posts: 27,564 ✭✭✭✭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?


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    #12
    meijin
    Registered Users Posts: 1,251 ✭✭✭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:


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    #13
    Graham
    Moderators, Society & Culture Moderators Posts: 17,642 Mod ✭✭✭✭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.


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    #14
    DubCount
    Registered Users Posts: 1,065 ✭✭✭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).


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    #15
    The Student
    Registered Users Posts: 1,238 ✭✭✭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.


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    #16
    steddyeddy
    Registered Users Posts: 27,564 ✭✭✭✭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.


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    #17
    The Student
    Registered Users Posts: 1,238 ✭✭✭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.


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    #18
    dubrov
    Registered Users Posts: 3,546 ✭✭✭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.


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    #19
    The Student
    Registered Users Posts: 1,238 ✭✭✭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.


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    #20
    dubrov
    Registered Users Posts: 3,546 ✭✭✭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


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    #21
    steddyeddy
    Registered Users Posts: 27,564 ✭✭✭✭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.


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    #22
    The Student
    Registered Users Posts: 1,238 ✭✭✭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.


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    #23
    Marcusm
    Registered Users Posts: 10,184 ✭✭✭✭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.


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    #24
    Marcusm
    Registered Users Posts: 10,184 ✭✭✭✭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!


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    #25
    dubrov
    Registered Users Posts: 3,546 ✭✭✭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


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    #26
    Marcusm
    Registered Users Posts: 10,184 ✭✭✭✭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


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    #27
    Marcusm
    Registered Users Posts: 10,184 ✭✭✭✭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.


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    #28
    The Student
    Registered Users Posts: 1,238 ✭✭✭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.


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    #29
    dubrov
    Registered Users Posts: 3,546 ✭✭✭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?


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    #30
    Marcusm
    Registered Users Posts: 10,184 ✭✭✭✭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!


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    #31
    Marcusm
    Registered Users Posts: 10,184 ✭✭✭✭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


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