Investment Property Case Study by Gretchen Merrick
Gretchen is a colleague of mine who did a case study on my listing at 9110 Church Street in Gilroy. I thought it was not only interesting but well done and she has given me permission to reproduce this study on my blog. It is as follows:
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.