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.
Seven Reasons to Own Your Home
Date: Tuesday October 28, 2008Posted in: real estate, home, wealth, buying a home, tax benefits, homeownership
1. Tax breaks. The U.S. Tax Code lets you deduct the interest you pay on your mortgage, your property taxes, as well as some of the costs involved in buying your home.
2. Appreciation. Real estate has long-term, stable growth in value. While year-to-year fluctuations are normal, median existing-home sale prices have increased on average 6.5 percent each year from 1972 through 2005, and increased 88.5 percent over the last 10 years, according to the NATIONAL ASSOCIATION OF REALTORS®. In addition, the number of U.S. households is expected to rise 15 percent over the next decade, creating continued high demand for housing.
3. Equity. Money paid for rent is money that you’ll never see again, but mortgage payments let you build equity ownership interest in your home.
4. Savings. Building equity in your home is a ready-made savings plan. And when you sell, you can generally take up to $250,000 ($500,000 for a married couple) as gain without owing any federal income tax.
5. Predictability. Unlike rent, your fixed-mortgage payments don’t rise over the years so your housing costs may actually decline as you own the home longer. However, keep in mind that property taxes and insurance costs will increase.
6. Freedom. The home is yours. You can decorate any way you want and benefit from your investment for as long as you own the home.
7. Stability. Remaining in one neighborhood for several years gives you a chance to participate in community activities, lets you and your family establish lasting friendships, and offers your children the benefit of educational continuity. Online resources: To calculate whether buying is the best financial option for you, use the “Buy vs. Rent” calculator at http://www.ginniemae.gov/.
The Basis of Wealth
Date: Thursday June 12, 2008Posted in: real estate market, real estate, real estate buyers, buyer's market, wealth, Theodore Roosevelt
I bet you’ve heard the saying, “Buy low, sell high.” Well, this is a “buy low” kind of real estate market we are in and now is the time to take advantage of it. I am working with a few clients looking in the $200,000 to $300,000 range and they are thrilled to have the opportunity to purchase in this “buy low” real estate market.
An interesting quote from President Theodore Roosevelt: 
“Every person who invests in well-selected real estate in a growing section of a prosperous community adopts the surest and safest method of becoming independent, for real estate is the basis of wealth.”
What was true at the beginning of the last century is still true today.
