Investment Property Case Study
Date: Saturday January 3, 2009Posted in: real estate, rentals, Santa Clara County, Gilroy, wealth, tax benefits, investment property
It has been quite a few years since a Bay Area residence could be purchased for investment purposes and have a positive cash flow from the income received from rent. But with the large drop in real estate sale prices, it appears that not only will there be great potential for gains in equity appreciation, but that the property will have a positive cash flow.
Let’s look at an example case study on a real property currently for sale in Gilroy. I chose this property because the Multiple Listing Service states that it is currently rented for $1900/month. This property is located at 9110 Church Street, has 3 bedrooms and 2 bathrooms, is 1132 sq.ft. and is on a 5227 sq.ft. lot. The list price is $279,000 (originally $369,000), and this property is a short sale.
Although we are given the current rent amount, there are other assumptions that must be made in order to analyze this potential investment. Here are the assumptions that I made:
- Purchase price = $250,000, 25% down payment = $62,500
- Loan: 6% interest rate with 1 1/2 discount points, 30 year loan, monthly payment = $1124.16, total acquisition cost = $5000 (including closing costs)
- Utilities paid by tenant
- Self-managed (no property management costs)
- 5% vacancy allowance
- Annual property taxes = $3125
- Annual insurance = $800
- Annual maintenance costs = $2500
- Investor’s federal tax bracket = 25%, California state tax = 9.3%
- Holding period = 7 years
- Annual appreciation, average over 7 years = 3% (hopefully this is a very conservative number)
- Projected sales costs = 7%
Using the above assumptions, the property can be analyzed as an investment, taking into account tax depreciation, cash flow before and after taxes. We will also look at the eventual sale of the property, looking at taxes due upon the sale and the after-tax rate of return.
- Income - Vacancy Allowance = Gross Operating Income = $21,660
- GOI - Operating Expenses = Net Operating Income = $15,235
- Subtract Mortgage Payments = $13,490
- ANNUAL CASH FLOW BEFORE TAXES = $1745
Looking at my assumption of selling the property in seven years with a conservative guess of 3% appreciation in value per year:
- Projected sale price in 2016 = $307,468
- Subtract cost of sale = $21,523
- Add 7 years of cash flow = $12,215
- Subtract remaining loan balance = $168,073
- CASH OUT ON SALE = $130,087
- Subtract initial investment of $67,500
- TOTAL GAIN ON SALE = $62,587
This example shows a viable real estate investment in south Santa Clara County with a before-tax rate of return of 8.55% on the investor’s initial $67,500 investment. Please consult your tax advisor for more information regarding the tax implications of buying, leasing and selling investment real estate.
4 Comments
Hi Diane. Yes, compared to other options, real estate investment is looking favorable these days. And you ask a good question about jobs - always a concern to real estate investors. Yes, Gilroy does have jobs to support $1900/month rent and Gilroy is located about 30 - 45 minutes south of Silicon Valley where there are many jobs that can support well over $1900/month in rent.
Comment by Gretchen Merrick on January 4th, 2009 @ 1:08 pmHi Gretchen,
I’m impressed with all your calculations. Good job of breaking down all the necessary statistics into such clear and understandable information. Can I quote you on my website or do a direct link? Let me know what you think.
Thanks,
Harriet
Comment by Harriet Pecot on January 5th, 2009 @ 9:34 amInteresting post. By any chance could you post an excel spreadsheet or ut.
Comment by Doug on February 7th, 2009 @ 12:09 pmLine and paragraph breaks automatic, e-mail address never displayed, HTML allowed: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>
Gretchen - It’s a great help to see how to work the numbers - pretty good return on investment compared to other options today! Since I’m not from the area - does Gilroy have many jobs that support the rent of $1900 per month?
Comment by Diane Kawell on January 4th, 2009 @ 12:45 pm