A Good Potential Cash Flow Property in Fort Collins

Investment Property for sale in Fort Collins

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)















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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%