# Cashflow Sources and Sinks
With equity understood, we're ready to bring into scope all the other elements that influence cashflow on a given real estate investment.
### Cash as the Metric for Each Pillar
Going back to our introduction on real estate investing, there are 4 pillars that make up an investment:
1. Startup Costs
2. Costs of Business
3. Exit Costs
4. Generated Income
Each pillar in it's own way will influence the performance of a given investment. Thus it is quintessential to see how much capital will be consumed or created by each pillar to determine if the overall investment is good or bad. The way we do that is by measuring the net relative cashflow produced by each pillar.
### Cashflow Quantified
For the purposes of Tadaima, the Buy and Hold is the investment strategy that is relevant, and is what we'll use for our calculations to come. That said, the same concepts of investing still apply to all strategies equally, and the same efforts can be used on a different strategy to determine it's relative effectiveness.
To calculate the net relative cashflow we use a set of assumptions along with a set of known expenses. The set of assumptions will be used to calculate estimates for things such as interest payments for the mortgage, but also equity gain as well. For the set of known expenses, we've collected what we know to be expensed during most real estate transactions, and assigned them to what we believe is a fair dollar amount for their service as well.
**The validity and accuracy of these are unknown and are not to be taken as factual**. Instead they are here to give a guidance to what one particular transaction might look like. Here below we've provided a **detailed cost and income breakdown** for a real estate investment assuming a **$500,000 home** with a **6% mortgage interest rate**.
***
#### **1. Assumptions**
* **Property Price:** $500,000
* **Down Payment:** 5% ($25,000)
* **Loan Amount:** $475,000
* **Loan Term:** 30 years
* **Interest Rate:** 6%
* **Estimated Monthly Mortgage Payment (P+I):** \~$2,848
* **Property Tax Rate:** 1.25% of home value ($6,250/year or $521/month)
* **Insurance Cost:** $150/month
* **Property Management Fee:** 8% of rental income
* **Vacancy Rate:** 5% of annual rental income
* **Estimated Rent:** $4,000/month
* **Appreciation Rate:** 3% per year
* **Annual Maintenance & Repairs:** 1% of property value ($5,000/year)
* **Closing Costs (Purchase & Sale):** 3%
***
#### **1. Startup Costs (Initial Investment)**
These are our costs that are required to start our real estate investment:
| Expense Item | Calculation | Amount ($) |
| -------------------------------- | ------------------------------ | --------------------------------------- |
| **Home Inspection** | Estimated | $500 |
| **Appraisal Fee** | Estimated | $600 |
| **Title Insurance & Search** | Estimated | $2,000 |
| **Loan Origination Fee (1%)** | $475,000 x 1% | $4,750 |
| **Legal Fees (Attorney)** | Estimated | $1,500 |
| **Permit & Licensing Fees** | Estimated | $500 |
| **Transfer Tax (0.75%)** | $500,000 x .75% | $3750 |
| **Intangible Tax (0.2%)** | $475,000 x .2% | $950 |
| **Prorated Property Taxes** | 6,250 ÷ 12 × 3 (3 months) | $1,563 |
| **Prepaid Interest** | ($475,000 × 6%) ÷ 12 × 15 days | $1187 |
| **Homeowners Insurance Premium** | Estimated | $1800 |
| **Total Startup Costs** | **Sum** | $19,100 |
***
These expenses are only incurred **once** at the beginning and that's it.
{% hint style="info" %}
You may be wondering why down payment itself is not included in startup costs. That's because down payment isn't a forgone expense. Assuming a 100% loss-less transaction, if the home had to be sold tomorrow, in theory, that money should be returned.
{% endhint %}
#### **2. Ongoing Costs of Business (Monthly Expenses)**
These are our costs to maintain our investment over time for however long we choose to stay invested:
***
| Expense Item | Calculation | Monthly ($) |
| ------------------------------------------- | ------------------------------- | ----------- |
| **Mortgage Payment (P+I)** | $475,000 loan @ 6% for 30 years | $2,848 |
| **Down Payment Opportunity Cost (5yr est)** | $25,000 x (1.07)^5 - $25,000 | $10,063 |
| **Property Taxes** | 1.25% of $500K / 12 | $521 |
| **Private Mortgage Insurance (PMI)** | 0.5% of $475K / 12 | $198 |
| **Maintenance & Repairs** | 1% of $500K / 12 | $417 |
| **HOA Fees (if applicable)** | Estimated | $100 |
| **Homeowners Insurance** | Estimated | $150 |
| **Landscaping** | Estimated | $50 |
| **Pest Control** | Estimated | $33 |
{% hint style="info" %}
Not all of these are routinely scheduled expenses, but for simplicity the one's that aren't have been estimated and allocated to a monthly amount.
{% endhint %}
#### **3. Exit Costs (Selling or Liquidating the Investment)**
These are our costs required to exit our investment, and release ourselves of all obligations that were required for us to maintain our investment before:
| Expense Item | Calculation | Amount ($) |
| --------------------------------------- | ----------------------- | --------------------------------------------------------------------------- |
| **Expected Sale Price (after 5 years)** | $500,000 × (1.03)^5 | $579,000 |
| **Realtor Commission (6%)** | 579,000 × 6% | $34,740 |
| **Staging & Final Repairs** | Estimated | $5,000 |
| **Capital Gains Tax (if applicable)** | Depends on gains & laws | Variable |
| **Prepayment Penalty (if any)** | Based on loan terms | 0-Unknown |
| **Total Exit Costs** | **Sum** | $**39,740** |
***
#### **4. Income Sources in Real Estate Investing**
Lastly we have our sources of value that our asset is generating for us, either in the form of equity, income, or expenses saved:
***
| Income Source | Calculation | Amount ($) |
| ---------------------------------------- | ------------------------------ | ----------------------------------------- |
| **Rental Income Saved (Monthly)** | Estimated | $4,000 |
| **Security Deposit (5yr yield)** | $8,000 x (1.07)^5 - $8,000 | $3,220 |
| **Property Appreciation (5 years est.)** | $500,000 × (1.03)^5 - $500,000 | $79,000 |
| **Principle Reduction (5 years est.)** | Estimated | $20,835 |
{% hint style="info" %}
Rental Income Saved isn't actually income. But because for the Buy and Hold investment, the property also provides the value of being able to reside in it, we need to quantify how much this value is as a utility. We do that by estimating what it would cost to rent an equivalent sized home.
{% endhint %}
***
### Final Takeaway
We started by defining what our investment was by selecting the Buy and Hold Strategy. To assess our investment we need to look at how it's influenced from each of the relevant pillars. To do this, we looked at each capital expense we anticipate being required as of our investment, and assigned it to it's relevant pillar. Now with each pillar defined by its related cashflow events, we can now use this information to model a given real estate investment.