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Example: Single Family Home Deal

So the question is, how do you go about purchasing a single famliy home as an investment property? We're here to help, take a look at the example below. Here's an example of a single family home purchased as an investment property.


Location: Seattle, Washington
Price: $549,950
Bed / Bath: 4 / 3.00
Year Built: 1963
Square Feet: 2,090
Lot Size: 7,800 SQFT
MLS#: 28038271
From: Windermere
Listing Type: Resale
Price/sqft: $263 (549,950/2090 = 263)
Lot Size: 7,800 sqft
Days on Market: 30 days
ZIP Code: 98117
Neighborhood:
Feautures: Big backyard, two car garage, and basement.

Remember: For your single family home investment, who's going to manage the property? Is it you or are you hiring a company to manage the property? This includes taking care of the landscaping, accounting, finding tenants, and fixing repairs. Don't forget to add your time spent doing general accounting.

Rough Numbers:
Down payment: 10% of $549,950 = $54,995 (Now, most investors will have to put down at least 25%)
Loan amount: $549,950 - $54,995 = $494,955
Property tax rate: 9.28% (estimate)
Expenses: % of gross earnings
Appreciation: 2% (For the past year, 2008, this stat from Best Places.net. So let's call that an increase of $11K per year. But again, real estate is all localized, so this appreciation rate will very not only from year to year but neighborhood to neighborhood. Reaching out to a real estate agent can give you a rough idea of what to anticipate. The median home cost in Seattle is $591,000. Home appreciation the last year has been 1.47 percent.

Let's say you have impeccable credit and you're able to secure a loan for $494,955, with an interest rate of 6.5% for 30 years. Let's do some calculations of your mortgage:

Loan amount: $494,955
Interest rate: 6%
Loan term: 30 YEARS
Annual tax: $1000.00
Annual insurance: $300

Monthly Principal + Interest: $3,128.45
Monthly tax: $83.33
Monthly insurance: $25
Total monthly payment: $3,236.78

Interest payment per year: .06 x $494,955 = $29,697
Mortgage payments for the year: 12 x $3,236.78 = $38,841
Principal payments for the year: $38,841 - $29,695 = $9,146

Per year appreciation growth: .05 x $549,950 = $27,497

Average Appreciation

There might be a period of moderate growth, or even a down turn, but there will be an uptick and even a push much higher. There are cycles in real estate. The benefits are long term in terms of appreciation. You'll hit an average rate of appreciation that will beat must other investments. What's the saying, slow and steady wins the race.

Gross income: 12 x $4,000 = $48,000
Operating expenses (managing property, landscaping, insurance, property taxes, painting - there are fixed and variable expenses): .05 x $48,000 = $2,400
Loan payments: $38,841
Cash flow = ($38,841 + $9,600) - $48,000 = -$441

But this exceeds the standard loan rate of $417,000, so you'll have to get a jumbo loan to purchase this property. However, Seattle is an area where the median price for a single family home
has exceeded $417,000, so the new jumbo now refers to loans over $729,750 for these areas.

Depreciation: improvements divided by total assessed valued = %
Example: 120K/27.5 years =

Residential: 27.5 years
Nonresidential: 39 years

Depreciation:
Less cash flow:
Lesss equity growth:

.28 (tax bracket) x above number =

Return:

Total return divided by down payment = %

Types of Analysis:

Capitalization rate
Comparative market analysis
Reproduction cost

Things to factor in and consider when buying a single family home:

Strategy Tip: If you want to live in the property for two years then you can recoup nearly all of the appreciation and avoid paying capital gains taxes. Or, you plan on selling the property and doing a 1031 exchange - upgrading to a new property that offers even better cash flow or appreciation.

Positives:

  • Sole owner of land and air above it
  • There are no association fees but you then have to take care of the landscaping and property
  • Usually appreciate faster than say a condo since there's a greater demand
  • Have more privacy

Negatives:

  • Unlike with a duplex or fourplex, you only have one tenant, so if there's a vacancy than there's no other source of revenue
  • General upkeep of the property - yardwork, storm damage, overall maintenance (all these costs add up)

Link

Property Tax Washington

Seattle PI - Levy Rates



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