# Help me understand my analysis

I am interested in purchasing a condo to rent out for investment purposes. I wrote my own online calculator to look at the whole picture over ten years. I am confused on the following results:

1. The sooner I pay off the loan, the lower my internal rate of return at the end of ten years

I suppose this is offset by my increased net worth after 10 years. But what is more important, my net worth or IRR?

1. If I decrease the purchase price, my IRR goes up. Can I use that information to iterate a purchase price that gives me a 7% IRR after ten years. Is that reasonable?

Doing that I find I need to offer 30k, but the seller is asking 37k. Is there a bug in my program/ assumptions or is the seller asking too much?

Thanks!

duke,

Your internal rate of return is affected by the amount of your initial down payment, your annual cash flow during your holding period, and your profit when you sell. Changing any of these parameters will change your IRR result. For example, a lower initial down payment will raise your IRR, as will a higher cash flow. However, a higher cash flow usually means a larger down payment.

If you want to compare your results to mine, download a copy of my Cash Flow Analysis spreadsheet. It only takes you out eight years and I don’t do any sensitivity analysis, but you may get some feedback from just experimenting with a different tool.

I checked out the spreadsheet but could not get my numbers to add up to yours. One thing I noticed is you calculate tax benefit as:

“depreciation dediuction” * tax bracket

In my program I calculate it as:

\$tax_deduction= (\$expenses + \$depreciation + \$interest - \$income ) * tax_bracket

Let me know which is right,

Thanks!

duke,

Take another look at my calculations. The “Tax Benefit(Liability)” is (Taxable income/loss) * (Tax Bracket)

The sum of (depreciation expense, interest expense, and total operating expense) is subtracted from the effective rental income to determine taxable income.

Let’s modify your calculations: \$income - (\$expenses + \$depreciation + \$interest) = taxable income(loss) – what I think you mean to call your tax deduction.
[]If the result is positive, then taxable income * tax bracket = tax liability. That is, the actual income tax you will pay solely as a result of your rental operations. []If the result is negative, then taxable loss * tax bracket = tax benefit. In other words, tax benefit is the amount by which your tax bill went down as a result of your rental operations.
Subtract the tax benefit/liability from your cash flow before taxes to determine your Net After Tax Cash Flow. Of course, these calculations assume that you do not have suspended passive losses that have to be carried forward. If the \$25K cap on net passive loss allowance applies to you, then some further calculations are needed to determine your true tax liability/benefit.