As we saw in my previous Investment Property Case Study 3, south Santa Clara County real estate can 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 a short sale home in a PUD in Morgan Hill.
The property chosen for this case study is 17495 Carriage Lamp Way, Morgan Hill, a 25 year old attached home in a Planned Unit Development with a large park, pool and clubhouse and monthly HOA dues of $300. This is a 4 bedroom, 2.5 bathroom 1797 sq. ft. home on a 3920 sq.ft. lot. The current list price of this home is $369,500. This property has been on the market for 92 days and the beginning list price was $454,500. I will make the assumption that the short sale lender will accept $350,000 for the purchase of this home.
Here are the assumptions that I made:
- Monthly rent amount = $2400
- Purchase price = $350,000, 25% down payment = $87,500
- Loan: 5.375% interest rate with 1 discount point, 30 year loan, monthly payment = $1470, total acquisition cost = $3825 (including closing costs and points)
- Utilities paid by tenant
- Self-managed (no property management costs)
- 5% vacancy allowance
- Annual property taxes = $4375
- Annual insurance = covered by HOA
- Annual maintenance costs = $3500
- Investor's federal tax bracket = 25%, California state tax = 9.3%
- Holding period = 7 years
- Annual appreciation: 3%
- 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 = $27,360
- GOI - Operating Expenses = Net Operating Income = $19,485
- Subtract Mortgage Payments = $17,640
- ANNUAL CASH FLOW BEFORE TAXES = $1846
- ANNUAL CASH FLOW AFTER TAXES = $3320 (takes cost recovery (depreciation) into account)
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 = $430,456
- Subtract cost of sale = $30,132
- Subtract remaining loan balance = $232,582
- Subtract tax due on sale = $24,794
- CASH OUT ON SALE = $142,948
- Subtract initial investment of $91,325
- Add 7 years of cash flow = $12,922
- TOTAL GAIN ON SALE = $64,545
Please consult your tax advisor for more information regarding the tax implications of buying, leasing and selling investment real estate.
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