This case study was discussed in the December Monthly Roundup Podcast.
Property Details:
- 4 Bedrooms
- 4 bathrooms
- List Price: $390,000
- Sold Price: $395,000
This house presented an excellent buying opportunity for an out of state investor who was looking to expand their investment portfolio. This investor was looking for a detached single family home. That is exactly what this home is; a good house in a good neighborhood that will continue to increase in value in the long run. This property also worked out really well because it is practically a turnkey investment. The seller gave a $2,000 credit for carpet because of some stubborn stains but no additional work was needed to prepare this home for rent. The property manager even commented that he needs more rentals like this for his portfolio. The numbers can be hard with more expensive single-family homes but these types of homes are in high demand and can be rented out very quickly.
The appraiser suggested that the fair market value rent for this home would be $2100. However, in his notes, he suggest that because of the high of these types of properties and low vacancy rates he would probably be able to get higher rents. He ended up renting the property out for $2250 per month.
The Numbers:
*Note that the values here are slightly off. The buyer put down 25%, not 20%.
Compared to a house hack this type of investment requires much more cash due at closing. Being an investment property a minimum of 20% down is generally required and this buyer decided to put 25% down. Given the state of the Denver market, an initial outlay of $100,000 is a serious investment but also a safe place to park money as the market continues to increase at an above average pace. Any additional amount down will help with the monthly cash flow however there will be a decline in cash on cash return but given this investors 30+ year timeline these metrics in the short run will have little bearing on the overall performance of the investment.
If this investment if essentially cash flow neutral, what is the point of the investment?
There are non-cash benefits that property offers immediately and as the property seasons and does become cash flow positive the investor will be able to reap both rewards. He is able to depreciate the structure that is on the land, 70% of the sales price, he is able to straight line depreciate about $10,000 per year for the next 27 years. This is worth nearly $3000, assuming a 30% tax bracket, in actual cash on his end of the year taxes. This home should also see healthy appreciation over the length of the ownership and as rents rise the cash flow will start to turn positive.
Keep in mind this particular investor also lives in the Bay area so numbers like this, while not spectacular, still offer a better return then his local market. It also required no additional repairs or maintenance items. The buyer has only seen the home twice and still receives a mid 4 cap rate with property management in place.
