Investment Property Case Study 3: 125 Bennett St., Gilroy
Date: Friday March 6, 2009Posted in: REO, real estate, Santa Clara County, Gilroy, foreclosure, investment property
As we saw in my previous Investment Property Case Study 2, 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. The home that will be analyzed here is an REO, i.e. bank-owned real estate.
The property chosen for this case study is 125 Bennett Street in Gilroy, a 12 year old home with easy access to Monterey Road. This is a 3 bedroom, 2.5 bathroom home on a 3600 sq.ft. lot. The current list price of this home is $289,900. This property has been on the market for 401 days and the beginning list price was $549,000. I will make the assumption that the bank will accept $280,000 for the purchase of this home.
Here are the assumptions that I made:
- Monthly rent amount = $1900
- Purchase price = $280,000, 25% down payment = $70,000
- Loan: 5.5% interest rate with 1 3/4 discount points, 30 year loan, monthly payment = $1192, total acquisition cost = $5000 (including closing costs and points)
- Utilities paid by tenant
- Self-managed (no property management costs)
- 5% vacancy allowance
- Annual property taxes = $3500
- Annual insurance = $900
- Annual maintenance costs = $2800
- Investor’s federal tax bracket = 25%, California state tax = 9.3%
- Holding period = 7 years
- Annual appreciation: 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 = $21,660
- GOI - Operating Expenses = Net Operating Income = $14,460
- Subtract Mortgage Payments = $14,304
- ANNUAL CASH FLOW BEFORE TAXES = $156
- ANNUAL CASH FLOW AFTER TAXES = $1,990 (takes cost recovery (depreciation) into account)
Looking at my assumption of selling the property in seven years with a guess of 4% appreciation in value per year:
- Projected sale price in 2016 = $368,461
- Subtract cost of sale = $25,792
- Add 7 years of cash flow = $1,092
- Subtract remaining loan balance = $186,513
- CASH OUT ON SALE = $157,248
- Subtract initial investment of $75,000
- TOTAL GAIN ON SALE = $82,248
Please consult your tax advisor for more information regarding the tax implications of buying, leasing and selling investment real estate.
4 Comments
Gretchen,
It’s a long term investors dream right now. Even it you up the the vacancy to 10%, it pencils out.
Comment by David Fen on March 7th, 2009 @ 4:37 pmGretchen,
Good solid information. There are some great investment property all over the San Francisco Bay Area. Lenders should start feeling comfortable qualifing investors with reasonable down payments.
Comment by Sam Benson on March 8th, 2009 @ 12:46 pmSuch a deal!! And they told me you can’t find a decent investment in the Bay Area.
Comment by Curtis Van Carter on March 9th, 2009 @ 1:05 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 - this seems like a perfect house to buy for investment since it’s just 12 yrs old - and can an investor purchase a home warranty to cover the major systems like a/c, water heater, built-in appliances, etc, that ‘might’ need replacing during the next 5 yrs? Wish I was coming to California to live ~ you’ve got some excellent values right now!
Comment by Diane Kawell on March 6th, 2009 @ 10:39 pm