Investment Properties Still Make Sense
Friday, January 25, 2019
I was talking to a client yesterday and he was on the fence about purchasing an investment property. I get very excited when people look to better their future by buying a house, buying an investment property or just investing. So here is the scenario we spoke about yesterday and we've changed the names to protect the innocent! OK, no names. LOL!
Purchase Price - $398,000.00 - 25% down + Closing costs and pre-paid items (Interest taxes and insurance) = approximately $108,000.00
Principal and Interest payments = $1602.41 (Interest $14,824 annually or $1235.42 monthly. Principal $4403.94 annually or $366.99 monthly)
Property Taxes = $415.00 / Insurance = $40.00 / HOA = $335.00 / Total Payment = $2392.41 - The property will likely rent for approximately $2400.00 per month so it will be a breakeven cash flow event for the first year.
If you raise your rent by 3% annually (It has gone up by over 5% annually for the past 10+ years) then you will be renting the property for approximately $2787.00 in 5 years, $3238.00 in 10 years and $3761.84 in 15 years. Your mortgage payment will stay the same, but your property taxes, insurance and HOA could change slightly over that time.
Property values have also increased by over 5.7% over the past 50+ years and if your property just increases by 3% per year then you will have a property that is worth $462,000.00 in 5 years, $537,000.00 in 10 years or $623,000.00 in 15 years.
So the return on investment (ROI) on $108,000.00 will be as follows:
Year 1 - $4403.94 in principal + $11,940.00 in appreciation = $16,343.94 -$1440 for 5% vacancy factor and $1440.00 for repairs and maintenance = $13,463.94 / $108K = 12.467% Return on investment.
Year 5 - $5376.78 in principal + $13,646.00 in appreciation + rents above payment $2,500.00 = $21,522.78 - $1619.00 for 5% vacancy factor and $1619.00 for repairs and maintenance = $18,284.78 / $108K = 16.930% Return on investment.
Year 10 - $6900.00 in principal + $15,852.00 in appreciation + rents above payment $7,500.00 = $30,252.00 - $1880.00 for 5% vacancy factor and $1880.00 for repairs and maintenance = $26,765.00 / $108K = 24.530% Return on investment.
Year 15 - $8855.00 in principal + $18,414.00 in appreciation + rents above payment $13,000.00 = $40,269.00 -$2000.00 for 5% vacancy factor and $2000.00 for repairs and maintenance = $36,269.00 / $108K = 33.582% Return on investment.
Year 30 - $18,718.00 in principal + $28,864.00 in appreciation + rents above payment $35,000.00 = $82,582.00 -$3000.00 for 5% vacancy factor and $3000.00 for repairs and maintenance = $76,582.00 / $108K = 70.909% Return on investment.
If the above model holds true then at the end of 30 years, you will be paying taxes, insurance and HOA of about $1500.00 per month on this property. Your property will be worth $977,000.00 and your rents will be about $5900.00 per month!
As you can see, Investment Properties can be very profitable!!!