Hello all. My question is what do you do when the interest portion on your positive cash flow property loan starts to go down. Eventually you’ll end up having to fork out money from your own pocket and you will be cash flow negative. A lot of the calculations on this web site are done with interst only figures, it doesn’t show the effect of principle plus interest. The problem occurs because you can only claim the interest portion of the loan, however you are stuck paying principle plus interest, which doesn’t become less; so what happens is the tax man sees your income or profit is getting larger but in truth it isn’t because you are paying the principle part as well. I know the money becomes part of the equity in the property but you are worse off from a cash flow sense.
Does anyone know how to improve your cash flow, which will be negative when the interest balance gets less?
Thank you.
Hi Jumbo.
The interest portion of P & I loans is very high for the first several years, and your principal repayments will be very small. By the time principal repayments become significant you will probably be involved with other investments, thus solving your cash flow problem! For example,after 5 years you should have enough equity in the property (from capital gains) to redraw for other investments.Below are approx figures for a $200K P & I loan over 30 yr @ 7%(if I’ve pressed the right buttons!). Repayments would be about $1331.
Year: Balance: Interest:
1 $197,968.38 $1155.84
2 $195,789.89 $1143.20
3 $193,453.93 $1129.65
4 $190,949.09 $1115.13
5 $188,263.18 $1099.55
6 $185,383.10 $1082.85
7 $182,294.83 $1064.94
8 $178,983.30 $1045.73
9 $175,432.38 $1025.14
10 $171,624.77 $1003.06
etc.Terry
FinanceHi Jumbo123,
The calculations are really not that hard, and in actual fact your bank will tell you on their statements the “interest” component you have paid and the “Principal” you have repaid. If they don’t just ask them!
For property investing it is nearly always better to use Interest only loans.
I am not sure I understand what you mean by “negative cashflow”. If it is positive cashflow to start with it should remain that way regardless of whether you started out with a Interest only or P+I (Remember that your rent should Increase over the years as well).
APIM
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