Should I buy an income property in this market? Well, as usual, that depends.
We are going to run the math on a bell curve Olathe, Kansas home, the city in which Ad Astra Realty, Inc is based. The house we will use is in the 66062 zip code, is 3 bedrooms, 2 baths, 2 car garage and is pretty much rent ready. People move to Olathe because of the jobs, affordability and the schools. The house is currently pending. I do not know the buyers or sellers.
HINT: Kansas City, the community, is in two states; Kansas and Missouri. We generally find Kansas investors are more for the appreciation, Missouri investors are more for the cash flow.
THIS IS FOR EDUCATIONAL PURPOSES ONLY AND NOT A GUARANTEE OF RETURNS
Buy price $270,000
25% down $67,500, closing costs of $3,400 m/l, plus $1,000 cap ex.
Total cash invested is therefore $71,900.
Amount financed is $202,500 at today's real estate investor rate of 6.75%.
Monthly P&I is $1,313 aka $15,756/yr is your Annual Debt Service
Estimated rent of $2,100/mo or
$25,200/yr - 5% vacancy = $23,940 Gross Operating Income
Estimated operating expenses are as follows.
- Taxes $3,142
- Insurance $1,900 m/l
- Management $1,617
- Lease out fee $1,575
- Repairs (not cap ex) $500
- Misc $200
- Utilities $150
Total Operating Expenses $9,084
1.Cash Flow Before Taxes
GOI of $23,940
- Operating Expenses $9,084
= Net Operating Income of $14,856
- Annual Debt Service of $15,756
= Cash Flow Before Taxes of ($900)
I don't generally recommend buying homes with no cash flow. We could put more money down, try to raise rents another $75/mo (though there are limits) and/or trim expenses a bit. And, of course, you could manage the home yourself. So as it sits our return from our cash invested of $71,900 is less than zero.
Annual Debt Service of $15,756
- Interest of $13,603
= Principal Reduction of $2,153
Principal reduction is real money (your tenants are buying a house for you!) but you really can't take a weekend to Cozumel from it. It's there but currently untouchable.
Net Operating Income $14,856
- Interest of $13,603
- Depreciation $7,260
= Taxable income of ($6,007)
x Tax Bracket of 24% is ($1,442)
Taxes saved is therefore $1,442
Your depreciation may vary very slightly depending on land cost estimates and, of course your taxes saved can vary due to your tax bracket.
So what does all this mean? Well, we invest money to make returns. In this case we are examining a piece of real estate instead of stocks or bonds. The last of the 4 Benefits of Real Estate Investing is 4.Appreciation. I can tell you what appreciation was but can never guarantee what appreciation will be. Inflation may play a part here, as well.
That said, the historical rate of appreciation is 4%, though that is not always the case as you can see here. We will use $270,000 x 4% = $10,800.
Cash on Cash is less than zero.
Capitalization Rate is 5.4%
Return on Investment without Appreciation is 3.8%
Return on Investment with Appreciation could be 18.8%
Should I Buy An Income Property In This Market?
Well, as I said to begin with, that depends. Is this the best house available? Is your current income secure? What do you believe the future will bring in regard to interest rates, house values and your personal income? Are you in a position to reap returns later or do you want returns now?
Everyone's situation is different. Feel free to reach out to me to discuss yours.