Real Estate Investing Math

Let's do some typical real estate investing math……. (Warning! Lots of numbers ahead!)

Example of an Annual Property Operating Data (APOD) for a
Single Family House in Fresno

Purchase Price	$150,000
Down Payment (20%)	$30,000
Loan : 1st mortgage	$120,000
30 yr fixed interest rate	$6.0
Monthly Principal & Interest	716

		Cash Flows	Notes
Potential Rental Income		$13,200	$1100/month
	Less Vacancy (5%)	660
Gross Operating Income (GOI)		$12,540
OPERATING EXPENSES		716
	Real Estate Taxes	1,800	1.2% of Purchase Price
	Property Insurance	420	Approx $35/month
	Property Management	840	Approx $70/month
	Repairs and Maintenance	627	Assume 5% of GOI
	Advertising	100
Total Operating Expenses		$3,787
Net Operating Income		8,753
	Less: Annual Principal & Interest Payments	8,591
CASH FLOW BEFORE TAXES		$162

Net Operating Income		8753
	Less: Total Mortgage Interest for 1st year	7160
	Less: Depreciation (assume land=30%)	3818
Taxable Real Estate Income		(2,225)
Tax Savings (assume 30% federal, 9% state)		(868)
CASH FLOW AFTER TAXES		1,030

* All figures are annual. Assume tenant pays all utilities (PG&E, Water, Sewer and Trash)

Example of Annual Property Operating Data (APOD) for a 15 unit apartment in Fresno

Purchase Price	$900,000
Down Payment (30%)	$270,000
Loan : 1st mortgage	$630,000
30 yr fixed interest rate	$6.5%
Monthly Principal & Interest	$3,961

		Cash Flows	Notes
Potential Rental Income		$108,000	$600/2bbdrm unit
	Less Vacancy (5%)	5,400
Gross Operating Income (GOI)		$102,600
OPERATING EXPENSES
	Real Estate Taxes	10,800	1.2% of Purchase Price
	Property Insurance	6,000
	Property Management	7,182
	Repairs and Maintenance	5,130
	Advertising	1,000
	Gardener	2,400
	Utilities	6,000
Total Operating Expenses		$38,512
Net Operating Income		64,088
	Less: Annual Principal & Interest Payments	47,527
CASH FLOW BEFORE TAXES		$16,561

* All figures are annual.

Example 3: Leveraging your Equity and Appreciation
Several assumptions are made here for simplicity:
• Appreciation rate = 5% per year
• No positive nor negative cash flow (break-even scenario, cash flow covers all mortgage payments, taxes, insurance, repairs, etc.)
• Assume no closing costs, Tax savings and depreciation benefits.
• Amount to invest = $30,000
• Interest rate = 6% per year, fully amortized over 30 years

First Year:
Buy 2 similar properties in the first year at $150,000 each, down payment =10%
Property #1 and #2
Purchase Price = $150,000
Loan amount = $135,000

5 years later:
Property #1 and #2
Appreciated value = $191,000
Loan Balance = $126,000
Equity (1 property) = $ 65,000
Total Equity = $130,000
Take the $130,000 equity and do a 1031 exchange into 2 larger properties. Purchase Price = $325,000 each. Assume that these are properties with 4 or less units. Down payment = 20%

Another 5 years Later:
For each property:
Appreciated value = $415,000
Loan Balance = $242,000
Equity (1property) = $173,000
Total Equity = $346,000
Take the $346,000 equity and do a 1031 exchange into one large property. Assume a property with 5 or more units. Purchase Price = $1.15 million. Downpayment = 30%

5 years later:
Appreciated value = $1,468,000
Loan Balance = $ 749,000
Total Equity = $ 719,000

Your starting investment of $30,000 has turned into $719,000 in just 15 years!!! This could be a nice college fund. This is the power of real estate investing: using leverage coupled with appreciation and tax-deferred exchanges. You may obviously be more aggressive if you choose to be.

Word of Caution: The information stated on this website is for general information purposes only. The subject of taxation is complicated and should be discussed with your legal tax counsel. We are not tax experts nor do we claim to be. The tax laws change frequently and must be referred to prior to entering into any sales contract. Please consult with your tax specialist before entering into any binding sales contract.