Calculating Profit/Loss on Rental Property

00ec25

londonman81 wrote: »

Just to clarify - I have listed the capital mortgage payment under 'Non-deductible costs' and the number is not used anywhere in my calculation until right at the end when I calculate the 'real' profit i.e. the profit personal to me. So I think we are on the same page..?

the point being made above is that your "real profit" includes the fact that £350 of mortgage capital (less income tax) has been paid off for you by the rental income. Your capital liability (mortgage debt) has decreased and therefore your net wealth has increased

your calculation is looking at it in terms of cash in and cash out, that is NOT "profit", it is cashflow, which is quite distinct from the "taxable profit" and your "real profit"

your "real profit" (ie capital + revenue) is:
1500 - 671 - 135 = 694 - 40% tax = 416 + (350 - 40%) = £626 pcm.
ie the amount by which your post tax net wealth increases each month - that is the financial impact from letting out the property or in your terms the "real profit"

londonman81 wrote: »

Also - if i have a lodger, can I offset expenses beyond £4250 tax free allowance? If so, how are they apportioned? If there are two rooms but one is much larger and hence could have two lodgers (a couple) while the smaller room is just the owner , can two-thirds of the expenses be apportioned to the lodgers and hence offset against the income from them?

Thanks

be careful!

if you are in fact a resident LL and therefore have lodgers not tenants all of the above costs must indeed be apportioned between your personal use and the business use. Therefore your £671 costs figure would be wrong in that case Is that why you have included utility bills etc which would not (normally) be paid by a LL if you were not resident? If that is so then all of the costs (except LL insurance and accountant fees) include an element of personal use and must be split accordingly otherwise your tax will be very wrong

you cannot claim expenses AT ALL if you claim the £4,250 rent a room allowance, that is the whole point of providing a tax free allowance it obviates the need to calculate your net taxable profit
if your costs are therefore more than £4,250 pa it is better to use the "normal" method of gross rent - costs = taxable profit

Annie1960

londonman81 wrote: »

Just to clarify - I have listed the capital mortgage payment under 'Non-deductible costs' and the number is not used anywhere in my calculation until right at the end when I calculate the 'real' profit i.e. the profit personal to me. So I think we are on the same page..?

You're really not understanding it if you think you can put a capital item through the P&L.

The profit is the profit as calculated via your P&L. There is no other type of profit - so the thing you are calling 'real profit' is a figment of your imagination.

Your P&L does not stand alone, it goes into a set of accounts which also includes the balance sheet, and the capital items sit on this.

Also - if i have a lodger, can I offset expenses beyond £4250 tax free allowance? If so, how are they apportioned? If there are two rooms but one is much larger and hence could have two lodgers (a couple) while the smaller room is just the owner , can two-thirds of the expenses be apportioned to the lodgers and hence offset against the income from them?

The quick answer is no. If you are using the Rent-a-Room scheme you can only have ONE lodger. If you have a couple, then you cannot use the Rent-a-Room scheme.

Thanks

..........

00ec25

Annie1960 wrote: »

..........

incorrect

you can have as many lodgers as you want, the limit is that you cannot have more than £4,250 of income tax free. The RAR is based on income not numbers

you absolutely can use RAR with a couple or any number of lodgers >1

the limitation on number of lodgers relates to Capital gains Tax liability, not Income Tax liability.
If you have more than 1 lodger then as far as HMRC is concerned you are running a "boarding business" and so your property loses part of its private residence relief and becomes liable for CGT as it now has an element of business use liable for CGT

Annie1960

00ec25 wrote: »

incorrect

you can have as many lodgers as you want, the limit is that you cannot have more than £4,250 of income tax free. The RAR is based on income not numbers

you absolutely can use RAR with a couple or any number of lodgers >1

the limitation on number of lodgers relates to Capital gains Tax liability, not Income Tax liability.
If you have more than 1 lodger then as far as HMRC is concerned you are running a "boarding business" and so your property loses part of its private residence relief and becomes liable for CGT as it now has an element of business use liable for CGT

Yes, sorry, you're correct. I was thinking of CGT which may apply if you have more than one lodger at a time.

londonman81

Pixie5740 wrote: »

Stop the bus for a minute. Are you letting a whole property to a tenant or tenants, or are you just letting rooms in the property in which you live to lodgers?

I'd like to know what the P/L would be in each case.

londonman81

00ec25 wrote: »

the point being made above is that your "real profit" includes the fact that £350 of mortgage capital (less income tax) has been paid off for you by the rental income. Your capital liability (mortgage debt) has decreased and therefore your net wealth has increased

your calculation is looking at it in terms of cash in and cash out, that is NOT "profit", it is cashflow, which is quite distinct from the "taxable profit" and your "real profit"

your "real profit" (ie capital + revenue) is:
1500 - 671 - 135 = 694 - 40% tax = 416 + (350 - 40%) = £626 pcm.
ie the amount by which your post tax net wealth increases each month - that is the financial impact from letting out the property or in your terms the "real profit"


be careful!

if you are in fact a resident LL and therefore have lodgers not tenants all of the above costs must indeed be apportioned between your personal use and the business use. Therefore your £671 costs figure would be wrong in that case Is that why you have included utility bills etc which would not (normally) be paid by a LL if you were not resident? If that is so then all of the costs (except LL insurance and accountant fees) include an element of personal use and must be split accordingly otherwise your tax will be very wrong

you cannot claim expenses AT ALL if you claim the £4,250 rent a room allowance, that is the whole point of providing a tax free allowance it obviates the need to calculate your net taxable profit
if your costs are therefore more than £4,250 pa it is better to use the "normal" method of gross rent - costs = taxable profit

I'm considering two separate cases:

1. Rent out whole property (which related to my initial scenario above)


2. Have lodgers - in which case I need to apportion the expenses on some basis - my question is how is that calculated? It is two-thirds if there are two lodgers in one room (a couple) or half (there are two rooms)?

Thanks

londonman81

00ec25 wrote: »

the point being made above is that your "real profit" includes the fact that £350 of mortgage capital (less income tax) has been paid off for you by the rental income. Your capital liability (mortgage debt) has decreased and therefore your net wealth has increased

your calculation is looking at it in terms of cash in and cash out, that is NOT "profit", it is cashflow, which is quite distinct from the "taxable profit" and your "real profit"

your "real profit" (ie capital + revenue) is:
1500 - 671 - 135 = 694 - 40% tax = 416 + (350 - 40%) = £626 pcm.
ie the amount by which your post tax net wealth increases each month - that is the financial impact from letting out the property or in your terms the "real profit"

To be honest I'm struggling to understand how the capital piece of the mortgage (£350) is being paid off by the rental income. The rental income is being offset against the deductible costs only i.e. the running costs and the mortgage interest component.

From a lay perspective, there is still £350 of the mortgage left to pay as well.

Annie1960

Going back to your original post, you are trying to work out break-even point (BEP).

BEP is normally calculated for industries such as manufacturing, where there is a high proportion of fixed costs.

In the rental industry, the equivalent would be for you to work out occupancy. So, how much occupancy would you need to cover all your fixed costs? In fact, it is done in reverse, working out how much void periods would mean you were losing money.

You can't really compare this (being a landlord of a property you rent out in its entirety) with using the rent-a-room scheme.

The former is a business, the second is not - it is increasing your income by renting out a room in your personal home. Apples and oranges.

00ec25

londonman81 wrote: »

To be honest I'm struggling to understand how the capital piece of the mortgage (£350) is being paid off by the rental income. The rental income is being offset against the deductible costs only i.e. the running costs and the mortgage interest component.

From a lay perspective, there is still £350 of the mortgage left to pay as well.

I will have one last try

you receive 1,500 in cash each month, using that cash you need to pay costs relating to:
a) expenses which will reduce your income tax liability as they relate to the costs of operating the rental ie revenue running costs; and
b) payments which will increase your net wealth because it reduced your total level of debt so is a capital cost

Question: if your only source of income was 1,500 rent receipts where would you get the money to pay the mortgage repayment element from?
Answer: you would spend it from the rent receipt.

Question: Could you claim that against income tax?
Answer: No.

Question: Do you still have to pay the lender even though you cannot claim it against income tax?
Answer: well durr!

if you did not let the property your would not receive an extra £1,500 per month nor (obviously) would you incur the additional running costs of having a let property including repaying the mortgage
your options:
1. do not become a LL:
a)sell off the property and you won't have to pay the mortgage; OR
b) keep the property as a second home and pay for the mortgage from your salary

2. let the property out as a non resident LL:
receive 1,500 rent which pays for all running costs and also funds the mortgage repayment and leaves you with an excess, after tax, of pure additional income you can spend anyway you want

3. take lodger(s):
receive £x rent which pays for running costs and also funds the mortgage repayment and leaves you with an excess, after tax, of pure additional income you can spend anyway you want

if you cannot see the difference between cashflow and taxable income then pay for someone to teach you

princeofpounds

You are getting confused between accounting profit and cashflow. I am not sure exactly what type of cashflow measure you think you want from your description, but it appears you are struggling towards trying to imagine something like Free Cashflow to Equity (google it, but don't get too tied up in the formulas; there are a few subtly but importantly different ways to visualise cashflows and most of the presentation will be oriented toward corporate analysis.)

Don't be hard on yourself; these concepts are really fundamental to investment and finance and most people have zero concept of what they even mean.

In your case, the capital repayments you make are not a cost. You lose some cash, but you reduce your debt by the same amount. Your net worth stays the same, so how can this be anything but zero cost?

Of course, you know it consumes cash, so there is some kind of burden there. And that's what you are confused by. It's probably better to think of it as an enforced savings scheme; the value is still yours but it gets locked up until the house is sold (and you hope it has appreciated!).

Many businesses get killed off by not being able to support their cashflow requirement, even if they are technically profitable. So it's great you have the sense that this is important.