2015 Buyers –Why Buy Rental Property Investments?
Share this analysis process with potential long-term investor buyers.
Investment opportunities in Real Estate are unbelievable. Many investors are once again “flipping” Distressed Properties or Bank REO’s for quick profit. But let’s look at the more conservative long-term investment opportunities that exist. See Below:
FACTS
- Current Price: $100,000
- Was $250,000 in 2005.
- Cost $170,000 to build new.
- Window of opportunity is now!
- INITIAL INVESTMENT
$100,000
× 20% down
$20,000 down
- CARRYING COSTS – $80,000 MORTGAGE
400 principle and interest
100 taxes
+ 100 insurance
600
× 12 months
$7,200 annual carrying costs
- RENTAL INCOME
$850
× 12 months
$10,200
–1,000 repairs & maintenance
–1,000 property management fees
$8,200 net rental income
- NET ANNUAL INCOME
$8,200 net income
–7,200 mortgage & expenses (in section 2 above)
$1,000 net annual income
- ANNUAL RETURN ON INVESTMENT (ROI)
$1,000
÷ 20,000 amount invested as down payment
5% annual rate of return on dollars invested (from rent income only – does not include appreciation)
- TAX DEPRECIATION
$100,000
–10,000 land value (cannot depreciate)
$90,000
÷ 29.5 years
$3,000 annual tax for buyer
× 35% tax bracket
$1,050 ( 5% additional annual from tax savings)
- TOTAL ANNUAL RETURN
5% net annual income ($1,000)
+ 5% tax savings ($1,000)
10% annual return comparable to stock market in 2010 if the property doesn’t appreciate
- PURCHASE PRICE EQUITY BASED ON REPLACEMENT COST TO CONSTRUCT AS BUILD SAME HOME
$170,000 cost to replace
– $100,000 purchase price
$70,000 built-in equity once new construction activity commences
- APPRECIATION
|
YEAR |
APPRECIATION |
EXPLANATION |
|
|
2010 |
$100,000 | — | Starting year |
|
2011 |
$100,000 | $0 | Market flat – no appreciation |
|
2012 |
$100,000 | $0 | Market flat – no appreciation |
|
2013 |
$105,000 | $5,250 | Add 5% appreciation |
|
2014 |
$110,250 | $5,512 | Add 5% appreciation |
|
2015 |
$115,762 | $5,788 | Add 5% appreciation |
|
2016 |
$121,550 | $6,077 | Add 5% appreciation |
|
2017 |
$127,627 | $6,382 | Add 5% appreciation |
|
2018 |
$134,009 | $6,700 | Add 5% appreciation |
|
2019 |
$140,709 | $7,035 | Add 5% appreciation |
|
2020 |
$147,774 | — | — |
*$47,774 in historical appreciation
- POTENTIAL PROFIT IN 10 YEARS AT DISPOSITION OR WHEN SELL PROPERTY
A) $47,774 historical appreciation likely
+ $70,000 built-in equity (in section 8 above)
$117,774 potential profit when sell
10% ANNUAL RETURN OF $2,000 PER YEAR (IN SECTION 7 ABOVE)
$2,000
× 10 years
$20,000
- TOTAL PROFIT
$20,000 annual ROI in 10 years
$47,774 appreciation
+ $70,000 recaptured equity
$137,774 return on $20,000 invested
CONCLUSION
$137,774 return on $20,000 invested = almost 700% increase! Compare that to the stock market.
ADDITIONAL CONSIDERATIONS
- Rent will continue to increase to improve ROI.
- Tax rate may increase leading to greater tax benefits.