If There’s No Appreciation the Next 5 Years, How Will You Do?
Posted @ 12:53 am - Filed under Cool Info
Here’s an example, using real properties recently purchased by real clients. I’m gonna modify some of the numbers, but the modifications will not in any way make the bottom line better by an inch.
What if you paid $250,000 for 4 properties, each with an annual gross scheduled income of $28,800.
The renters sign year long leases, and tend to stay a little longer than two years. We’ll set the operating expenses and vacancies at just under 40% — $10,080 a year. This results, when using currently available loans, in a negligible cash flow of less than $100 monthly — essentially a break even.
The down payment used will be 10%, though I’ll use 11% for any return figures. In these transactions you’ll be credited up to 2% of the sales price for your closing costs. We’ll further assume the rents and expenses will not alter the first year’s cash flow of $1,135 or so for each property. We’ll also assume any increases in expenses will serve to cancel out any rent increases. The loans are fixed rate, amortizing, with a 6.25% interest rate.
If in five years the value is still $250,000 — what will you have gained? Of course, you didn’t invest to find yourself in a non-appreciating asset. Since your crystal ball is in the shop, we’ll just consider it your time in Murphy’s barrel.
So, what will you have gained in this scenario?
Income tax savings of around $3,500 a year, or $17,500 over 5 years Before tax cash flow of $1,135 annually, or $5,675 over 5 years Principal reduction of $15,000 (9 bucks less) over 5 years
It took about $27,500 +/- to close each of the four purchases, meaning you’ve invested a total of $110,000. In 5 years without values increasing, here’s what happened.
Add up your 5 year total for tax saving
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