…in reference to the CFAT calcs for real estate?
interest payment vs. principal payment.
i’m assuming they are two different things when doing these calculations…
You can only subtract interest when calculating taxes but use debt service to calculate the cash flow. I.E.: Taxes = (NOI - Depreciation - Interest)(tax rate) Cash flow = NOI - debt service - taxes
Assuming amortized loan Debt service = monthly mortgage amount. Same amount for next 30 years includes principal and interest. Interest is tax deductible. Interest is determined by the amortization schedule. Very high at first so but very low later in the life of loan. So net after tax cashflow is higher in the beginning vs end.
To follow up this topic with two practice exam questions from Book 6 and Book 7: 1) Book 6, Exam 3 AM, Q#35, it uses interest expenses as the debt service. $2,240,000. while… 2) Book 7, Exam 2 AM, Q#46, debt service = PMT to pay off the loan. I am pretty confused about which approach to use. Anyone has any insights?
not 100% but I believe interest is - interest, while debt service is the entire payment, so interest and principal.
i believe debt service is only Principal part that you repay. (and any prepayments) that is why Int is deducted while calculating taxes.
Thanks CP and jut111, I will just say the first approach was wrong then. Use the PMT method for debt service if it comes up on the exam.
from investopedia… What Does Debt Service Mean? Cash required over a given period for the repayment of interest and principal on a debt. Investopedia explains Debt Service Your monthly mortgage payments are a good example of debt service.
Based on this discussion, I would say that in less technical settings, debt service is same as interest expense. However, for analysts and accountants, interest expense means the interest portion of the debt payment, not the whole debt payment (or debt service).
and if you looked at the Real Estate chapter - they do make a distinction by giving you a smaller # for the INterest payment - used to arrive at the tax # and a larger # for the Debt Service - which is used to arrive at the CFAT. (which could of course mean like ju111 says above that the # includes both Interest + Principal).
An interest expense is defined as the amount an individual, business or organization pays for interest on a loan. It is called an expense because it is the cost of borrowing money. The interest is just another bill like paying rent. so i guess debt service is interest and principal
Debt service is Prin. + Interest. Think about the debt service coverage ratio…you’re looking at the ability to make scheduled debt payments as a whole, not just one piece of it.