Apartment management is a popular real estate investment option for beginners because initial costs are relatively low.
However, many investors end up short of funds because their initial financial plans were too optimistic.

This time, we will introduce the key points of apartment management, focusing on cash flow and taxes.

What worsens the cash flow of apartment management?

One of the most important aspects of managing an apartment complex is financial management.
It would be ideal if things went according to the original plan, but various factors come into play and deviations from the plan occur.
First, let's look at what factors are causing the cash flow to worsen.

Vacancy risk

The risk of not filling vacant rooms is the risk that must be most carefully considered when managing an apartment building.
Since the only income from apartment management comes from rental income, controlling the risk of vacancy directly leads to controlling income.

In order to reduce the risk of vacancy, various measures are taken such as improving facilities and equipment and renovating, but the most important thing is to conduct thorough research before investing, such as on the location and living environment.

Choosing a management company

It is easy to think that all management companies are the same, but choosing the wrong management company will gradually worsen your cash flow.

If you neglect daily cleaning and maintenance of the exterior walls and interior, it can lead to tenant dissatisfaction and hinder your ability to recruit new tenants.

In addition, unnecessary equipment updates and excessive upgrades to equipment that are not suited to the location or customer targets can also cause financial management to deteriorate.

Deviations from the original funding plan

It is surprisingly common for there to be a large discrepancy between the initial financial plan and actual income and expenses.

It is easy to take measures if the discrepancy between income and expenses is easy to understand, such as being forced to lower rent or having to pay for repairs, but there are some cases where it is unclear why the property is short on funds.
In such cases, loan principal and interest payments and taxes often come into play, worsening cash flow.

Cash flow in apartment management

As the term "cash flow management" suggests, it is important to focus on cash flow when running a business and judge whether it is good or bad. This is also true for apartment management.

It is especially important to be aware that when it comes to expenses in apartment management, there are some that can be recorded as business expenses and some that cannot.

What can be expensed?

In apartment management, expenses that can be deducted include not only directly related expenses, but also related expenses that can be deducted.

Expenses directly related to apartment management

・Costs of outsourcing to management companies
・Advertising costs for recruiting tenants
・Building repair and maintenance costs
・Taxes and public charges such as fixed property tax, stamp duty, and real estate acquisition tax
・Property insurance premiums such as fire insurance and personal property insurance
・Interest on loans
・Depreciation expenses (buildings, building accessories, other facilities)

Among the expenses listed above, the one that is recorded as an expense even though it is not actually paid in that year is "depreciation expense."
Depreciation is an expense based on an accounting system that expense buildings and building accessories (plumbing equipment, electrical equipment, etc.) based on their useful lives.
The legal useful life of buildings varies depending on the structure: 47 years for reinforced concrete structures, 34 years for heavy steel-framed structures, and 22 years for wooden structures. The legal useful life of building accessories varies depending on the equipment, but is generally around 15 years.

The initial expenditure amount is recorded as an expense each year, prorated over the statutory useful life.

Other expenses related to apartment management

・Internet communication fees used for property searches, etc. ・PC/tablet fees
・Costs for seminars to gather information ・Costs for books, newspapers, magazines, etc.
・Transportation and vehicle expenses used to view the property
・Tax accountant and lawyer fees

Items that cannot be expensed

Not being able to record expenses means that even though cash has actually gone out, it is not considered a loss when calculating income tax and local resident tax. This discrepancy is the reason why cash flow management is confused.

A typical example is the principal portion of a loan. A fixed amount is paid every month from surplus funds, but it is not included in accounting profit and loss calculations.
In addition, repair expenses that are equivalent to expansions and renovations are considered capital expenditures (part of the building) and are subject to depreciation. Therefore, a certain amount will be recorded as expenses in the future.

Furthermore, income tax and local resident tax cannot be recorded as expenses. Income tax and local resident tax are calculated by multiplying the income, which is the result of calculating income and expenses, by the tax rate, so they naturally cannot be recorded as expenses.

The trap of loan principal and interest payments and depreciation

As such, because actual cash movements and profit and loss for tax calculation purposes differ, it is important to understand the cash flow income and expenditure and the profit and loss for tax calculation purposes separately.
In particular, you should pay attention to loan principal and interest payments and depreciation.
When purchasing a used apartment, the depreciation period is short, so a large amount of depreciation will be recorded for a few years after the investment, which will significantly reduce the burden of income tax and resident tax.

However, as soon as the depreciation period ends, you will be shocked to find that your income tax and local taxes have increased. On the other hand, your loan payments and other expenses remain almost the same, so this is often the time when your financial plan goes awry.
When considering financial planning, it is necessary to have a clear understanding of not only the actual cash inflows and outflows but also changes in the amount of tax paid.

Next time: "Apartment management and taxes"
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