On Monday I did a post titled “What Return Should You Be Looking For?” and I had a comment from a regular reader asking me to show how I can get the returns I promised. So I thought I would work out a potential investment/rental property right here in Kansas City in the Waldo neighborhood that I had a hunch might work.
I looked at a property the other day. Definitely not a charmer. But nothing too bad about it, either. It sits on a street that gets traffic, but not too much. Just blocks from an elementary school.
Typical Waldo house. This one has two bedrooms. One addition. A crawl space that will make new home owners a little nervous…don’t worry, it’s like every other crawl space in this area…and could use a few things done to it.
I expect the rents to be in the $640-$675 range. That’s based on knowledge of other similar housing within a few minutes walk of here.
Waldo is a neighborhood that goes up and down based on the fortunes of the local economy. It has suffered a bit these last 9-12 months. But not too badly. And I don’t expect it to get any worse, comparably speaking, to anything around it. With this house at the right buy I can honestly say I would expect a 1% appreciation rate your first year. Yes, I’m being serious and conservative. You can expect blue collar or lower service industry type renters. Hardworking people that make up this country.
Anyway, let’s hit the numbers, shall we? All numbers will be close estimates. I cannot tell the future but I’ll bet, looking back, I’m not too far off.
Purchase price: $55,000. 20% down, 7% interest with 1 point. House payment of $293 per month.
Expected expenses to include $500 for repairs, $800 property management for you out of towners, $200 utilities when vacant, 5% vacancy, $100 miscellaneous, $600 insurance and about $977 in taxes.
Expected income will be $650/mo.
That leaves us with a Net Operating Income of $4,223 and Cash Flow Before Taxes of $707/yr. Principal Reduction will be $450. Your tax benefits (depreciation, interest, etc) will save you about $105/yr. if you are in the 28% tax bracket.
That means you have a cash on cash return of 5.24%. A capital growth return of 9.01% without appreciation. (Cap growth formula for me is Cash Flow Before Taxes + Principal Reduction + Tax Benefits / Total Cash Invested.) With the expected appreciation mentioned that jumps to 13.4%.
Now how about if you are a local Kansas City Real Estate Investor? If you are willing to manage the property yourself you are looking at a return of 15.27% without appreciation and 19.35% with the modest appreciation mentioned.
Getting back to my previous post, you have to ask yourself are these numbers worth the investment, time and risk you take. But then again you have to ask yourself on any investment, right?
We can tweak those numbers mentioned to a degree. You can choose to put down 25% to get a slightly better return on your cash flow and a better interest rate. But then again you can save that extra 5% and combine it with other funds and buy two rental houses that are bringing in a 10%-12% return rather than one house bringing in a 13% return. Follow?
For those of you that don’t know me I’ve tried to be as real as I can about those numbers mentioned. Believe or don’t believe. The choice is yours. But if you owned some Kansas City investment property you’d have an excuse to eat some of our good barbeque.
Now, I’m going to go mourn my Jayhawks losing yesterday. And get ready for next weekend!