I've got a bit of a financial puzzle I'd like some input on.
My wife is going away to school for 3 years, so she will need housing during that time. As budding buy and hold investors, we thought this might be a great opportunity to add to our portfolio and get some tax deductions to boot. I'm distilling this problem down to two choices based on actual numbers I have gleaned. My pro forma is pretty conservative, so I'm pretty sure we can hit the mark.
I did not account for rental increases in either scenario, as I assumed they would be at the same rate given both options would occur in the same market. I used 10% management, 10% repairs, 3.5% cap ex, 10% vacancy. I also did not add in any ancillary expenses (e.g. Cable) since they would be the same in either scenario. The property is not in a market that will appreciate much over this time period. I tried to make this as “apples to apples” as possible.
OPTION A: Wife rents an apartment
Rent & utilities: $800/mo.
Housing expenses after 3 years: $28,800
NET EXPENSES AFTER 3 YEARS: $28,800
OPTION B: Buy duplex, wife lives in one side
NOE when renting out one side: $465/mo.
Housing expenses after 3 years: $16750
Initial down payment for purchase: $19600 (including $10k in closing costs/repairs)
GROSS EXPENSES AFTER 3 YEARS: $36,350
Down Payment Equity after 3 years: $9600
Debt Service Loan Paydown: $4650
TOTAL EQUITY AFTER 3 YEARS: $14,250
NET EXPENSES AFTER 3 YEARS: $22,100
Difference between Options A & B: $6700, or about $186/month.
So, understanding that “anything can happen” in landlording, is the $6700 savings worth the extra responsibility and PITA factor?
Your thoughts and feedback graciously appreciated!
Forgive me, I'm going to answer your question with some questions: What happens after she graduates? Y'all keep the property and renting out both sides? If so, how does that start to change the cashflow in 5-10 years?
Personally, is that worth the trouble (to you) to be a landlord of a place further away once she graduates? Are you cool with renting to college students?
I would do that analysis and answer those questions. Would love to hear what happens!
Have you accounted for your tax shield from depreciation in your hack scenario? I recently just ran the same analysis and the tax shield is material.
Net cash flow with both units rented is, conservatively, $250 positive monthly. It might be a challenge using a PM for this property (we self manage at home) but we could do it and probably would (built into pro forma) and in our long term plans of moving south we would be turning our entire portfolio over to a PM or selling it, which is also an exit strategy here.
The tenant base would be non-traditional graduate students, or white collar commuters to two nearby MSAs (the property is a tenth of a mile from the Interstate).
I did not include that. However, if we sell (see above) there would be recapture. If we held, it would be an extra tax shield as you mentioned. I also neglected to account for the tax deductions on 50% of the expenses as well.
So, the purchase is looking better given those factors, but I guess what I am attempting to answer myself (with your help!) is it good enough to be worth it given our mid and long term plans?
Thanks for your continued feedback!
@Wesley W. Thanks for the follow-up! It sounds like a positive net of $2200/yr for 3 years and then approx $3k/year for the duration of your debt. Minus the cost of property mgmt after year 3. Plus, the benefit of depreciation that you would get as @James W. mentioned. If $3k-PM+Dep per year is acceptable to you, I would go for it.
Added benefit: this might be a helpful taste of what the future would be like when you do move south and use a PM firm remotely. If it's a profitable heads-up, why not? Like anything else, just keep an eye on the numbers as you move forward in case you have to pull the trigger and sell.
Disclaimer: I am currently closing on my first deal. Someone with more experience chime in? I'd hate for you to encounter a pitfall I didn't think of in this analysis!
I would factor in transaction costs too. You might not have any when you buy but if you wanted to sell after three years, you will have those costs which can really eat into your profit.
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