This section explains how to calculate finance and interest costs for your investment property.
All the interest calculations are done via the Finance Sheet.
1. Navigate to Smart Rea Training-1 and then to the Finance page.
The Loan Amortization table will be displayed.
Loan Amount, Annual Interest Rate, Term Of Loan In Years and First Payment Date fields will be populated automatically.
Enter values for the following fields:
Payment Frequency: The frequency/interval at which you have to pay your loan installment. The available options are Annual, Semi-annual, Quarterly, bi-monthly, Monthly, Semi-monthly, Bi-weekly, Weekly, and Daily. Usually, the payment frequency will be once a month.
Compound Period: The span of time between when interest was last compounded and when it will be compounded again. When interest compounding occurs, interest is added to the principal on a loan. You have to check for this field from your lender/bank.
Payment Type: The time of the month when you will pay the loan installment.
Rounding: If set to On all the above field values will be rounded off.
2. Click Update All
All the calculations in the Amortization Table section will be done and updated in the SmartREIA sheet.
3. If in any of the months you can make an extra payment, then enter that amount in the Additional Payment column.
The extra payments you have entered in the Finance sheet will be updated in the Extra Payments field, of Interest Calculations section, in the SmartREIA sheet as shown below.
You can also view the calculated interests in the Interest Calculations section of the SmartREIA sheet.
The field descriptions for Interest Calculations sections are:
Interest Costs: The cumulative amount of interest that you will pay towards the loan, for the term of the loan.
Extra Payments: Any additional payments that you make in a year.
Principal Paid: The balance amount at the end of the loan term or the amount still owed on a loan.
Loan Balance: the remaining amount that you have left to pay on your loan.
Annual Debt Service(Principal+Interest): The total amount of principal and interest payments made over a 12 month period.
Depreciate, Real Property: Decline value of your property over time.
Depreciation, Capital Additions: If you have made capital improvements, then you can claim depreciation for those as well.
4. Click Update All.
After updating you will notice that the cashflow runs negative from the year 2020 to 2031.
Depreciation is not the expense that you pay from your pocket. It is the expense that you claim on your investment property.
If you do not sell the property at all, the depreciation will be beneficial because you can continue claiming a negatively geared property.
If you are not claiming any depreciation on your property, then the cash flow will be negative for the first 11 years.
If you are buying the property to offset your tax with another option where you are negatively gearing the property for tax benefits, then negative cash flow is acceptable.
However, if you are buying the property for cash flow, then without claiming depreciation it will be coming out of your pocket.
You can enter the additional payments in the Finance sheet every year(Only if you have any) until the cash flow becomes positive.
For example, additional payments have been added for five years, but the cash flow is still negative for the first 11 years.
Here, the purchase price and weekly rent paid were not that realistic, so let us consider changing the purchase price to $950000 and click Update All.
After updating, notice that the negativity decreased for the first seven years.
Now, navigate to the Finance sheet and make all the additional payments as ‘0’.
Click Update All.
Now, the cash flow has started to yield positive values from years 8 to 9. So to make cash flow positive, you need to make some other payments.