Rental Income Tax - 250k SFH and ROI of 4.8%
After doing analysis on a 250k SFH, we find out that the Monthly Cash Flow will be $200, yielding a Cash on Cash Return on 4.8%.
I do think tax will be a decisive factor (Depreciation, and all) when buying a property but my wife thinks otherwise. Please advise.
Thank you
@Khoi Nguyen The problem with $200 cash flow is when you have a large issue arise after a year, your entire year's cash flow will be wiped out because you may not have had enough time to accumulate reserves in your maintenance and cap-ex accounts.
Taxes and depreciation are definitely a factor, but I would hold that priority behind cash flow and appreciation potential. It should be more the icing on the cake instead of a reason you pursue a deal (in my opinion). Seek a tax professional's judgement to get a better idea of how this would play out in you and your wife's unique circumstance.
Is that before or after Cap Ex, maintenance , and Property management?
how many of these homes do you need to own to retire in 10 years?
Quote from @Devon Harris:
Is that before or after Cap Ex, maintenance , and Property management?
After all of expenses
@Khoi Nguyen if we say land is 25k your annual deprecation will be around 8k. With out knowing the income it will bring in hard to say, but in reality it likely will not be a big tax advantage right off the bat, but it will provide cash flow while when coupled with the expenses give a little write off. I doubt a SFH @ 250k would do much of anything to your taxes, however the other things like the cash flow and equity build up should be.
If you are looking for cash flow to replace income cash on cash is great, however a lot more goes into a property than the numbers to make a deal good. But positive cash flow after all expenses is better than no cash flow, no property, and no loan paydown.
Go get it!
Quote from @Khoi Nguyen:
Can you post all the numbers? It doesn't sound right that you would get a return of 4.8% but cash flow $200. I'm not a math whiz, so maybe I'm missing something.
Quote from @Nathan Gesner:Assuming 250k home, with 20% down payment and income of 2182
Quote from @Khoi Nguyen:
Can you post all the numbers? It doesn't sound right that you would get a return of 4.8% but cash flow $200. I'm not a math whiz, so maybe I'm missing something.
Income 2182
Mortgage (1398)
Tax (234)
Insurance (67)
Vacancy Reserve (50)
Repairs Reserve (50)
CAPEX Reserve (183)
>>> Net Income = 200
Annual CF = NI *12 = 2400
Initial Investment = 250000*0.2 = 50000
>>> CoC Return = 2400/50000= 4.8%
Please let me know if my calc is wrong
Quote from @Khoi Nguyen:
Try using the BP calculator because I'm coming up with different numbers.
I notice you are only calculating $50 for vacancy and $50 for maintenance. Those are too low. You can expect 10% of rent income for maintenance as a reliable average. Most people will recommend you set aside 10% for vacancy ($210 per month) and 10% for capex.
I recommend sticking with 10% for each category until you're more experienced and know the market better.
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@Khoi Nguyen guessing you're buying a Class A property? They rarely actually cashflow the first 3-5 years, but appreciation MAY make up for that.
At least 80% of "real estate investors" are really hobbyists.
Why?
They're buying SFR properties at retail prices!
We did that on the first property we bought, then never again.
As an investor you should be patient and look for deals that meet one of the following:
1) You buy below market value
2) You buy with little to nothing down
3) You buy with seller financing
This past December, we bought a package of 4 Class B- properties that met ALL 3 of these!
You also have to make sure you have a clear vision of how an acquisition will make you money and have as many exit strategies as possible.
80%+ of investors hire a Realtor to find them a property. That Realtor solely looks on the MLS.
We've only done one transaction via the MLS (out of 20+) in the last 10 years. Even on that one we got seller financing and low down payment, something our agent was shocked was accepted.
Quote from @Drew Sygit:
@Khoi Nguyen guessing you're buying a Class A property? They rarely actually cashflow the first 3-5 years, but appreciation MAY make up for that.
At least 80% of "real estate investors" are really hobbyists.
Why?
They're buying SFR properties at retail prices!
We did that on the first property we bought, then never again.
As an investor you should be patient and look for deals that meet one of the following:
1) You buy below market value
2) You buy with little to nothing down
3) You buy with seller financingThis past December, we bought a package of 4 Class B- properties that met ALL 3 of these!
You also have to make sure you have a clear vision of how an acquisition will make you money and have as many exit strategies as possible.
80%+ of investors hire a Realtor to find them a property. That Realtor solely looks on the MLS.
We've only done one transaction via the MLS (out of 20+) in the last 10 years. Even on that one we got seller financing and low down payment, something our agent was shocked was accepted.
Thank you for sharing!
Question: If you buy with little or nothing down, the PMI will be bad for your Cash Flow. What is the bright side of putting little to nothing down if you just barely break even?
Thanks again
Quote from @Drew Sygit:
@Khoi Nguyen guessing you're buying a Class A property? They rarely actually cashflow the first 3-5 years, but appreciation MAY make up for that.
At least 80% of "real estate investors" are really hobbyists.
Why?
They're buying SFR properties at retail prices!
We did that on the first property we bought, then never again.
As an investor you should be patient and look for deals that meet one of the following:
1) You buy below market value
2) You buy with little to nothing down
3) You buy with seller financingThis past December, we bought a package of 4 Class B- properties that met ALL 3 of these!
You also have to make sure you have a clear vision of how an acquisition will make you money and have as many exit strategies as possible.
80%+ of investors hire a Realtor to find them a property. That Realtor solely looks on the MLS.
We've only done one transaction via the MLS (out of 20+) in the last 10 years. Even on that one we got seller financing and low down payment, something our agent was shocked was accepted.
Nice info. I regret buying my first property at retail as well.
Patience is definitely key.
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@Khoi Nguyen everything is a tradeoff!
We paid over asking for a package of properties we bought 18 months ago because the seller was mainly interested in getting their price, was offering seller-financing, but also wanted a set monthly payment. We were able to negotiate a very modest downpayment and everything made sense for us.
You need to find what tradeoffs work for you to make your numbers:)