Yearly Cashflow vs Real Profit
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Once again, for those who just joined us :- ) consider the following rental house:
| Sale Value | + $300,000 |
| Debt (mortgage) |
- $200,000 |
| Original purchase price | 200,000 |
| Monthly rent incoming | + $1,500 |
| Monthly debt service (mortgage) |
- $1,200 |
| Monthly cashflow ("profit") | + 300 |
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Looks pretty simple? The newspapers report my "profit" as $300 per month, or $3,600.
Actually my "profit" was $50,000, amigo. I bought the house 2 years ago for $200k and now can sell it for $300k. The appreciation is what you care about.
Now you want me to show that I'm losing money on this dream rental house?
| Sale Value | + $300,000 |
| Debt (mortgage) |
- $200,000 |
| Original purchase price | 200,000 |
| Monthly rent incoming | + $1,500 |
| Monthly debt service (mortgage) |
- $1,200 |
| Monthly payments to mortgage | - $1,000 |
| Year's payments to improvements | - $6,000 |
| New value of home after improvements | $350,000 |
| Monthly negative cashflow "profits" | - $1,200 |
| Yearly loss (instead of "profits") | - $8,400 |
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Easy squeezee. Now I actually made $100,000 last year, but the papers report that my "profit" was an $8,400 loss.
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You might say, "But you can't spend that $150,000 in equity." Of course you can. It's called a line of credit. Banks can, and routinely do, extend these to MLB franchises. In the 10's of millions of dollars.
It's just that if you do take out a 2nd mortgage on the above house -- say $50,000 -- then your eventual profit (cash at close) is down from $150,000 to $100,000. And you're the kind of guy who likes looking at $150,000 on paper, not the kind of guy who likes to buy a boat.
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Point #1: Forbes at this link does show the M's as "middle of the pack" as far as 2013 cashflow. (Many times they've been number 1, while losing 95 games.)
But! Check the debt/ratio column. WOW! The Mariners' debt ratio is only 2%?
The M's have simply plowed yearly cashflow back into things (such as debt paydown) that increase the eventual PROFIT when they sell the franchise. They are simply the type of franchise that prefers to look at huge equity on paper (value of the franchise) rather than spending money (say, on Nelson Cruz).
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Point #2: the M's operating income ("yearly profit", sic ) has been impacted by the fact that they have run their product into the ground. They used to draw over 3,000,000 fans, you know. The rental house no longer draws a nice rental payment because the roof is falling in.
Doesn't matter. What's $100 more or less in rent? I'm looking at my equity in the house, which is $100,000, not $100.
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Point #3: teams AVERAGE -$12M per year in negative cashflow, but most can easily go to -$40M or even -$80M, as the Dodgers have. The Mariners could easily raise payroll by $50M, never mind the new TV deal.
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So when they pass on the cleanup hitter they need, keep it in mind. It's because they don't want their debt ratio to go from 2% to 3%. Not because they would have to dip into personal checking accounts.
I'm not saying the Mariners are the devil, because they like a clean balance sheet more than they like baseball. I just wish people would stop saying that the Mariners' hands are tied on payroll.
Cheers,
Jeff