South County Real Estate Today

Investment Property Case Study 3: 125 Bennett St., Gilroy

March 6th, 2009 // Categorized under: Buyer Information

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.

125 Bennett Street, Gilroy, CA

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.

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This entry was posted on Friday, March 6th, 2009 at 7:32 pm and is filed under Buyer Information. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

Diane Kawell said at March 6th, 2009 at 10:39 pm
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!
David Fen said at March 7th, 2009 at 4:37 pm
Gretchen,

It’s a long term investors dream right now. Even it you up the the vacancy to 10%, it pencils out.
Sam Benson said at March 8th, 2009 at 12:46 pm
Gretchen,

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.
Curtis Van Carter said at March 9th, 2009 at 1:05 pm
Such a deal!! And they told me you can’t find a decent investment in the Bay Area.