This morning I went through a foreclosure listing at 801 Bitterbrush Ln today with another broker in our office. We were impressed with what we saw and I thought it’d be a great first hand example of a potential investment property in Fort Collins.
Background Info
This home is within a 1/4 mile of Front Range community college, has 2 bedrooms, 1 bath and is 847 sqft. It also has a 2 car garage, a nice fenced in yard, and sits on a corner lot. It is VERY clean compared to other bank owned properties. Did I mention the bamboo floors in the living room? At $139,900 it’s going to be hard to find a home in this type of condition in Fort Collins. Most single family homes are going to need quite a bit of work.
The Numbers
Now here’s where the fun part happens. You’re probably thinking, okay that’s great, but how do I know it’s a good investment. Well let’s run the numbers. For this example, we’re going to assume you buy this property with 20% down, secure a conventional loan at 4.5%, and are able to charge $1,000/month for rent. ( I know of 2br. apartments going for $1,000/mo. right now)
So pretend you’re the potential investor. You make an initial investment of $32,177 (20% + $4,197 closing costs) and for the next 5 years get an annual 9.33% return on your investment. Sounds pretty good huh? Also, even better this number already factors in paying a property manager 10% each year and paying 6% to sell the property after 5 years. Don’t forget, we also assume you buy the property for list price.
To improve your return, the first place I would start would be to ask for closing costs on this property. Just this ~$4,000 discount would bring your initial investment down to $27,980 and increase your yearly return to 12.15%.
| purchase price | $139,900 | |||||||
| allocation– | ||||||||
| land | 20% | $27,980 | ||||||
| house | 80% | $111,920 | ||||||
| down payment | 20% | $27,980 | ||||||
| closing costs | 3.00% | $4,197 | ||||||
| total initial investment | $32,177 | |||||||
| loan amount | 80% | $111,920 | ||||||
| loan terms | ||||||||
| term | 30 | years | ||||||
| interest rate | 4.50% | |||||||
| monthly PI | $567.08 | |||||||
| mortgage insurance | 0.00% | $0.00 | per month (percentage is annual renewal rate) | |||||
| total monthly payment | . | $567.08 | ||||||
| annual interest | $4,826 | (averaged over holding period) | ||||||
| rental increase per year | 2.50% | |||||||
| monthly rent | $1,000 | |||||||
| average monthly rent | $1,026 | (averaged over holding period) | ||||||
| annual rent | $12,000 | (gross scheduled income) | ||||||
| average annual rent | $12,308 | (gross scheduled income averaged over holding period) | ||||||
| vacancy allowance | 3.0% | $369 | ||||||
| annual operating expenses | ||||||||
| property taxes | $1,112 | |||||||
| insurance | $420 | |||||||
| utilitities | $- | $0 | ||||||
| maintenance | 6% | $738 | (percent of gross scheduled income) | |||||
| management | 10% | $1,194 | (percent of gross operating income) | |||||
| HOA | $- | $0 | ||||||
| 2nd | $- | $0 | ||||||
| other | ||||||||
| FYI Total Monthly payment and HOA | $694.72 | |||||||
| total operating expenses | $3,464 | |||||||
| investor tax bracket | 33% | |||||||
| holding period | 5 | years | ||||||
| annual appreciation | 3% | |||||||
| cost of sale | 6% | |||||||
| reinvestment rate | 2% | (before taxes) | ||||||
| This material is designed to provide information about the subject matter covered. The accuracy of the information is not guaranteed. This material is sold or offered with the understanding that the author and/or publisher are not engaged in rendering legal, accounting or other professional services. If legal advice or other expert assistance is required, the services of a competent professional should be sought. | ||||||||
| gross scheduled income | $12,308 | |||||||
| less vacancy allowance | $369 | |||||||
| gross operating income | $11,938 | |||||||
| less operating expenses | $3,464 | |||||||
| net operating income | $8,474 | |||||||
| less annual payments | $6,805 | |||||||
| cash flow before taxes | $1,669 | per year | $139.12 | |||||
| cost recovery (depreciation) | 27.5 | years | ||||||
| annual recovery | $4,070 | |||||||
| principal reduction | $1,979 | (NOT deductible) | ||||||
| taxable income or (loss) | ($421) | (cash flow before taxes less cost recovery) | ||||||
| tax savings | $139 | (taxable loss times marginal tax bracket) | ||||||
| cash flow after taxes | $1,808 | (cash flow before taxes plus tax savings) | ||||||
| projected sales price | $158,284 | (from annual appreciation and holding period) | ||||||
| sale cost | $9,497 | (projected price times estimated cost of sale) | ||||||
| net sales price | $148,787 | |||||||
| adjusted basis | $123,748 | (initial price plus closing costs less total annual cost recovery) | ||||||
| taxable gain on sale | $25,039 | |||||||
| capital gains tax | ||||||||
| cost recovery | 25% | $5,087 | (tax on gain from cost recovery) | |||||
| non-cost recovery | 15% | $703 | (tax on remainder of gain) | |||||
| total tax due from sale | $5,791 | |||||||
| after tax proceeds | ||||||||
| net sales price | $148,787 | |||||||
| mortgage balance | $102,024 | |||||||
| taxes due | $5,791 | |||||||
| net after tax proceeds | $40,972 | |||||||
| cash flow after taxes | $1,808 | |||||||
| net accumulation | 1.34% | (after tax reinvestment rate) | ||||||
| amount accumulated | $9,288 | |||||||
| wealth position | $50,260 | (net after tax proceeds plus accumulated cash flow) | ||||||
| yield factor | 1.56 | (ending wealth position divided by initial investment) | ||||||
| after tax annual yield | 9.33% | |||||||