PropRetire

What is left of the rent after costs?

A sum of coins, the rent received, with the operating costs and the loan repayments taken off onto plates of their own, and what is left, the cash before tax, in coral

A rental leaves less cash than its rent. Take the rent received, then take off the operating costs paid and the full loan repayments for the same period. What is left is the cash before tax. It differs from taxable income, and it promises no income in retirement.

A lease can show a weekly rent while a smaller amount reaches your bank account. The managing agent's fees may come out before the deposit arrives. Other bills and the loan repayment may leave the account later.

An example month, before tax

Every figure here is made up for the example, in Australian dollars. None is a real rent, a typical cost or a customer's case. Say the rent came in and every cost and repayment below was paid in the same month. Nothing else came in or went out for the property that month.

Rent received
$2,400
Less operating costs
$600
Less full loan repayment
$1,500
Cash left before tax
$300

The $600 is operating costs only, such as management fees or property bills. It leaves out the loan interest, as the full loan repayment already holds it. The strip has no tax, as this example does not work it out.

Principal repayment is not income

In this example, the $1,500 repayment is made of interest and principal. The two add up to the repayment. They are not an extra cost to take off again.

Interest $1,100 Principal $400

The principal pays back borrowed money and lowers the loan balance. It still uses cash that cannot also pay the household's bills. Paying down debt can lift the owner's net position. It is still not rental income paid into a bank account.

Taking off only the interest would leave $700 after operating costs. That overstates the cash left by $400, as it misses the principal. Taking off both the full repayment and its interest would count the interest twice.

One month is not a yearly budget

A usual month, with no repair bill or yearly insurance bill, can look comfortable. A month when those bills arrive can look worse. Neither month alone shows what the property adds over time. So the example's $300 should not be multiplied into a yearly income forecast.

Six columns in a row, the costs paid each month, five low and the fifth high and in coral, the month a bill arrives

MoneySmart's guide to buying an investment property lists ongoing costs such as rates, insurance, management and maintenance. It warns that rent may not cover the mortgage payments and other expenses. Use its list to check your own records. It does not replace your actual bills.

PropRetire's current cashflow reads the same three parts from the recorded rent, property expenses and loan repayments. It gives the period each record covers.

Work from a complete period of rent, operating payments and loan repayments. If you start from the agent's deposit after fees, do not take the fees off a second time. Keep money set aside for future bills apart from bills already paid.

Keep the tax question separate

This sum of cash does not decide which payments you can deduct. A positive balance before tax does not show what is left after tax either. The tax needs its own records and the rules that apply, checked with a registered tax agent where needed. Before you count on the cash left for household spending, allow for tax and for bills still unpaid or to come.

A stack of coins in a tray, its top four gone into the closed tax box in coral beside it

Read next: The property records to gather before retirement

General information only. Not financial, tax, legal or credit advice.