Would you buy a $5,148 Cashflow with $2k of capital gains?

21 Replies

I'm looking to make my first deal, but don't know if I want to go with this one. It is $20k out of pocket with $5,148 of cash-flow a year and $2k of capital gains. I only have $50k to invest and am putting aside $800/month towards investing from my salary. My question is, the cash-flow is great for the San Antonio market, but the gains are not, is it still a good deal? I want to buy and hold. I know the typical motto is "You have to make money when you buy it." What are the cons and pros of a deal like this? Any input would help!

25% plus cash on cash return? Yea, absolutely that's a buy. So much so I'm not sure I believe it. And what's the $2000 in capital gains? Give us more numbers.

Oh this would have helped. The price is $99,500. The seller is covering the closing costs since I'm going conventional. 3 bed 2 bath, 1 car garage. 1151 sq ft. I don't exactly know what this means, but it says 2yr and 10yr warranties applied. New appliances.

Rent? I'm guessing you're putting the $20K down and getting a loan of about $80K. That would have a P&I payment of about $430. $5148 a year in cash flow is $430 a month. So you would need rent of about $1700 a month to get there, assuming you're using a PM. Without a PM you would need rent around $1350.

Thank you for your help @Jon Holdman !

Here are the numbers that we generated:

Prop ins annual - $1,000

Prop Tax annual - $256

Down payment - 20%

Interest rate - 4.75%

W/ seller contribution of 4.5%

The rent to generate that cash flow would have to be $950 without at PM. (PM means property manager right?)

@Aroldo Villarreal Are you assuming that you won't have any maintenance or capital improvements needed?

Rent: $950

Expenses, capital, and vacancy: $342 (assumes self management for free)

NOI: $608

P&I payment: $417 ($80,000, 4.75%, 30 years)

cash flow: $191/month, $2288/year

Cash on cash return: 11.4%, assuming total investment of $20,000

That's an OK deal, but its not $5000 a year. If you do decide to use a PM, they typically take 10% off the top and have a fee to fill a vacancy. I'm assuming one vacancy per year with a charge of half a months rent. That drops your cash flow to $58 a month, $692 a year for a 3.5% cash on cash return. What that should tell you is the property is only generating a very small return and you're earning the majority of it by doing the PM job.

You're assuming taxes and insurance are your only expenses. A common new investor error. You have many others: vacancy, CPA fees, legal fees, pest control, maintenance (even if its brand new or newly rehabbed), utilities (at least when vacant), capital items (roofs, ACs, etc.) Then there are the ugly ones that are unlikely, but possible: major tenant damage, a lengthy eviction, lawsuit, etc. You WILL have these expenses. I have to run a new stove over to a tenant this weekend. I paid $6200 last year to replace a sewer line. The best months you will have will return the number you're estimating. The worst ones will be much, much worse.

@Aroldo Villarreal you need to get yourself educated on how to figure cash flow and cash returns. There are a lot quick rule of thumb methods to get you started like the 50% rule. Read through the Learn section above it loaded with lots of great information on buying and renting property. I have been doing real estate for 20 years and learned loads from reading through it. Start some key work alerts on things like "cash flow" or the 50% rule". Read some of the old threads on this. I made the same mistakes you are. Take my advice and learn from reading on this site and not from getting your self into a bad deal. You have resources here that are way better than some of those $20K Guru courses you see offered on TV.

You also haven't mentioned what you mean by capital gain of $2K. You imply some benefit of $2K but you don't explain waht it is. My guess is you are counting on $2K that isn't there.

Originally posted by @Ned Carey :
You also haven't mentioned what you mean by capital gain of $2K. You imply some benefit of $2K but you don't explain waht it is. My guess is you are counting on $2K that isn't there.

Based on everything he posted I'm guessing he's figuring his "capital gain" is due to the fact he's buying for $2k less than full appraised value.

He's confusing capital gains with equity. In this case there wouldn't actually be any real equity because if he went to sell it immediately after buying it even if he could get full appraised value he'd still lose thousands after closing costs.

@Ned Carey Yes, it is exactly what @Patrick L. said,I thought unrealized capital gains was the same thing as equity. My math was, I buy for $99,500, it is worth $102,300. I thought capital gains would be the difference between those two. Is that actually equity and NOT capital gains? I thought I knew what capital gains were.

@Jon Holdman @Dusty Corning Yes, you are right. I was assuming those were going to be my only expenses. Since it is a brand new house, I didn't think I would have that many expenses. Also, what does NOI stand for?

The Lifestyles Unlimited Realtor said it is a great purchase, that she would buy it if she didn't have her money tied up in another deal. But then again, as they say, never ask a barber if you need a haircut.

Thanks to everyone for all the help and advice, my brain is working a ton to store everything I'm learning!

NOI is "net operating income". That's what's left after subtracting all expenses. Its what you would make if you paid cash for the property.

Of course the realtor said its a great purchase. Its great if you purchase it because then she gets a commission. Its not the worst deal I've seen, but its hardly a "great" deal.

Brand new does mean some of the big ticket items won't need repaired for a while. But eventually it will need those items, so you have to budget for them from the start. And many expenses happen whether its new or old.

Rent - PITI is what I call "phony cash flow". Its commonly quoted by sellers and their agents. But its just not true, and if you build a business plan assuming it is you will fail.

I'm questioning your tax number,,I"ve never heard of a property worth anything close to $100k in Texas with $256 a YEAR in property taxes,,,I don't know the taxes for Bexar county, but you should really look at that,,it just doesn't fit.

I figure 2.7% of property value as my annual tax cost,,I'm in Dallas county, so it is different with different school districts, but your number just doesn't sound right

@Aroldo Villarreal

your property taxes are going to be closer to $200/month which leaves you with negative cashflow. The only reason it was $256/year last year is because it was a new build there was no structure to tax just the land!

Originally posted by @Aroldo Villarreal :
My math was, I buy for $99,500, it is worth $102,300. I thought capital gains would be the difference between those two. Is that actually equity and NOT capital gains? I thought I knew what capital gains were.

Technically you only have a capital gain when you sell. What you have is Equity.

However do you really know the property is worth exactly $102,300? Even appraisers can't predict any closer than about 5%. Also as mentioned by Patrick resale costs would eat up that small amount of equity.

@Andy Collins Would you happen to know if there's a place where I can find property tax percentages for different areas of the state? They seemed extremely low to me too, but I naively thought it was just the area it is in.

@Gautam Venkatesan You are more than likely right. It is a new home and that's probably why the taxes were so little since it more than likely was just an empty lot before.

@Ned Carey Oooooohhh, that makes sense. So equity is when you buy it and capital gains are when you sell it. I thought the terms were interchangeable.

look up a property on your county tax appraisal districts website, even looking at another property in the same town/school district, you will see what the rates are, and remember you won't get homestead exemption for a rental, so take the original calculation for taxes, before deductions for homestead, etc

I live in San Antonio (Bexar county), usual property taxes are right at 3% (around 0.296 or 2.96%) to be more precise. I don't think your deal is a good deal although I'm not familiar with New Braunfels area, but it shouldn't be too different since we're pretty much IN the same city. There are much better properties to be had. good luck, and if I was you, I would look for advice from impartial investors/realtors. BP is deffinitely the way to go.

don't forget to use the free "investment calculators" here on BP, they are a great tool for analyzing properties.

Hey Aroldo, when a realtor tells you they would "buy it myself but my money is tied up in another deal", run far, far away. This sounds like a terrible, horrible deal to me. I would offer 70k , if the realtor refuses to present the offer I would get another realtor.

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