Investment Property Case Study 2
Date: Friday February 6, 2009Posted in: REO, rentals, Morgan Hill, bank-owned, investment property
As we saw in my previous investment property case study , south Santa Clara County real estate can now be purchased for investment purposes and have a positive cash flow from the income received from rent. Not only will there be a positive cash flow, but there is great potential for gains in equity appreciation.
Last month I looked at an example case study on a property in Gilroy and this month I will look at Morgan Hill. The property chosen for this case study is 17230 Torrey Way located near the Morgan Hill City Hall. There is a pool and spa in the backyard of this 4 bedroom, 2 bathroom, 1340 sq.ft. home sitting on a 7370 sq.ft. lot. The current list price of this home is $359,900 and it is a bank-owned property. This property has been on the market for 37 days. Most likely the list price is a little high for this 52 year old home in an old part of Morgan Hill. Therefore I will make the assumption that the bank will accept $325,000 for the purchase of this home.
Here are the assumptions that I made:
- Monthly rent amount = $2000
- Purchase price = $325,000, 25% down payment = $81,250
- Loan: 5.5% interest rate with 1 5/8 discount points, 30 year loan, monthly payment = $1384, total acquisition cost = $6000 (including closing costs and points)
- Utilities paid by tenant
- Self-managed (no property management costs)
- 5% vacancy allowance
- Annual property taxes = $4062
- Annual insurance = $1000
- Annual maintenance costs = $3250
- Investor’s federal tax bracket = 25%, California state tax = 9.3%
- Holding period = 7 years
- Annual appreciation: we’ll look at 3% and 4%
- 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 the total gain on the sale.
- Income - Vacancy Allowance = Gross Operating Income = $22,800
- GOI - Operating Expenses = Net Operating Income = $17,738
- Subtract Mortgage Payments = $16,608
- ANNUAL CASH FLOW BEFORE TAXES = $1130
- ANNUAL CASH FLOW AFTER TAXES = $3,090 (takes cost recovery (depreciation) into account)
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 = $399,709
- Subtract cost of sale = $27,980
- Add 7 years of cash flow = $21,630
- Subtract remaining loan balance = $243,750
- CASH OUT ON SALE = $149,609
- Subtract initial investment of $87,250
- TOTAL GAIN ON SALE = $62,359
Looking at the same 7 year holding period but with a 4% average annual appreciation:
- Projected sale price in 2016 = $427,678
- Subtract cost of sale = $29,937
- Add 7 years of cash flow = $21,630
- Subtract remaining loan balance = $243,750
- CASH OUT ON SALE = $175,621
- Subtract initial investment of $67,500
- TOTAL GAIN ON SALE = $108,121
The increase in annual appreciation from 3% to 4% increased the gain by $45,762.
Please consult your tax advisor for more information regarding the tax implications of buying, leasing and selling investment real estate.
2 Comments
Gretchen - using the conservative example of 3% annual appreciation, then what do you calculate as an overall rate of return on the initial investment of $87,250 so that it can be compared to other possible uses of the initial funds?
Comment by Diane Kawell on February 8th, 2009 @ 12:26 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>
Very interesting - good work!
Comment by Harriet Pecot on February 7th, 2009 @ 9:01 amHarriet