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Real Estate Investing Math

Let's do some typical real estate investing math……. (Warning! Lots of numbers ahead!)

Example of an Annual Property Operating Data (APOD) for a
Single Family House in Fresno

Purchase Price $150,000
Down Payment (20%) $30,000
Loan : 1st mortgage $120,000
30 yr fixed interest rate $6.0
Monthly Principal & Interest 716
  Cash Flows Notes
Potential Rental Income $13,200 $1100/month
  Less Vacancy (5%) 660  
Gross Operating Income (GOI) $12,540  
OPERATING EXPENSES 716  
  Real Estate Taxes 1,800 1.2% of Purchase Price
  Property Insurance 420 Approx $35/month
  Property Management 840 Approx $70/month
  Repairs and Maintenance 627 Assume 5% of GOI
  Advertising 100  
Total Operating Expenses $3,787  
Net Operating Income 8,753  
  Less: Annual Principal & Interest Payments 8,591  
CASH FLOW BEFORE TAXES $162  
     
Net Operating Income 8753  
  Less: Total Mortgage Interest for 1st year 7160  
  Less: Depreciation (assume land=30%) 3818  
Taxable Real Estate Income (2,225)  
Tax Savings (assume 30% federal, 9% state) (868)  
CASH FLOW AFTER TAXES 1,030  
* All figures are annual. Assume tenant pays all utilities (PG&E, Water, Sewer and Trash)

Example of Annual Property Operating Data (APOD) for a 15 unit apartment in Fresno
Purchase Price $900,000
Down Payment (30%) $270,000
Loan : 1st mortgage $630,000
30 yr fixed interest rate $6.5%
Monthly Principal & Interest $3,961
  Cash Flows Notes
Potential Rental Income $108,000 $600/2bbdrm unit
  Less Vacancy (5%) 5,400  
Gross Operating Income (GOI) $102,600  
OPERATING EXPENSES    
  Real Estate Taxes 10,800 1.2% of Purchase Price
  Property Insurance 6,000  
  Property Management 7,182  
  Repairs and Maintenance 5,130  
  Advertising 1,000  
  Gardener 2,400  
  Utilities 6,000  
Total Operating Expenses $38,512  
Net Operating Income 64,088  
  Less: Annual Principal & Interest Payments 47,527  
CASH FLOW BEFORE TAXES $16,561  
* All figures are annual.

Example 3: Leveraging your Equity and Appreciation
Several assumptions are made here for simplicity:
• Appreciation rate = 5% per year
• No positive nor negative cash flow (break-even scenario, cash flow covers all mortgage payments, taxes, insurance, repairs, etc.)
• Assume no closing costs, Tax savings and depreciation benefits.
• Amount to invest = $30,000
• Interest rate = 6% per year, fully amortized over 30 years

First Year:
Buy 2 similar properties in the first year at $150,000 each, down payment =10%
Property #1 and #2
Purchase Price = $150,000
Loan amount = $135,000

5 years later:
Property #1 and #2
Appreciated value = $191,000
Loan Balance = $126,000
Equity (1 property) = $ 65,000
Total Equity = $130,000
Take the $130,000 equity and do a 1031 exchange into 2 larger properties. Purchase Price = $325,000 each. Assume that these are properties with 4 or less units. Down payment = 20%

Another 5 years Later:
For each property:
Appreciated value = $415,000
Loan Balance = $242,000
Equity (1property) = $173,000
Total Equity = $346,000
Take the $346,000 equity and do a 1031 exchange into one large property. Assume a property with 5 or more units. Purchase Price = $1.15 million. Downpayment = 30%

5 years later:
Appreciated value = $1,468,000
Loan Balance = $ 749,000
Total Equity = $ 719,000

Your starting investment of $30,000 has turned into $719,000 in just 15 years!!! This could be a nice college fund. This is the power of real estate investing: using leverage coupled with appreciation and tax-deferred exchanges. You may obviously be more aggressive if you choose to be.

Word of Caution: The information stated on this website is for general information purposes only. The subject of taxation is complicated and should be discussed with your legal tax counsel. We are not tax experts nor do we claim to be. The tax laws change frequently and must be referred to prior to entering into any sales contract. Please consult with your tax specialist before entering into any binding sales contract.