Does these Numbers Work as a SF Rental? Depreciation?

Question

Ok I think I might have one Finally!  I used the cashflow worksheet from this board and came up Positive!!

Purchase Price:  32,900
Down Pay             6580
Loan Amt.           26,320

Yearly Cashflow Analysis

Gross Rent      7200
Vacancy            (244)
Taxes                (400)
Ins.                    (300)
Management       (250)  if i decide to use one
repairs               (500)
Utils                   (150)
Advertise            (100)
Lawn                   (200)  I need lawnmower
Contingency        (500)

Operating Inc       $4512
Debt. Service        (2100)
Pretax Cashflow    2412
Princ. Payments     259
Depreciation          (1196)

TAXABLE INCOME $1,474   Does all of this look realistic?

50% Rule

7200/2 = 3600 - 2100(DS) = $1500  Is this right?

So I think that i did my math right.  Does everyone agree with the numbers?  Would you put in more expense since the house was built in 1930 and is a wood frame?

Also, I am still foggy on this depreciation thing.  I havent grasped it conceptually quite yet.  Am I subtracting it from profit so I can reduce my yearly income and write it off...it seems like in this case, I might really make 1500 or so dollars and only be taxed on 400 of it?  I have read the depreciation threads and still havent gotten it, can anyone explain or guide me to a book or link that would lay it out for me?

Thanks in advance for any advice I can get.  I appreciate your time and knowlede.  I have learned so much (almost all) of what I know from this forum and have been working really hard to land a deal.  I have been saved several times by you guys!!

Will Barnard · Answer

From your 50% rule numbers, you did it correct except you left out the down payment money. To evaluate a deal like this, and to keep it simple, most will take the entire purchase costs for the debt service. In other words, you have $6600 down + some closing costs I assume, so you should tack on the extra $7000 and calculate that into your cost of debt service. That would be approx $41 monthly or $492 annually making your corrected updated pre-tax cash flow $1008 annually or $84 monthly which is slighlty under your $100 per door goal.

As far as the depreciation, assuming you are eligible to use it all, this is how to calculate it:
Take the improvement value Total value less land value) which can usually be estimated as 80% of total value and divide by 27.5.
So for your property here is what it looks like:
Total value = $32,900
Improvement value = $26,320
$26,320 / 27.5 = $957.09 tax deduction
Assuming you are in the 25% tax bracket, your annual tax savings is $239.27
So for simplicity sake, if you had $84 in monthly pre-tax cash flow, you would get to deduct $79.76 ($957.09 / 12 months) of that for a net taxable gain of only $4.25.

Again, this all depends on your tax situation so it is important to consult with your RE CPA on these items.