Is buying cheaper than renting? Property Check
Eric Zunkley
While I was out looking at properties with a client and I came across a newly constructed duplex. On a price per square foot basis it was cheaper than the other properties listed in the area. I was curious to look at the numbers and see if it would be cheaper to own and rent out one unit or rent something comparable in the area.
1728 S Highland Ave.
Listed at $1,199,000
Duplex
Unit 1 3 Bed 2.5 Bath, Unit 2 4 Bed 3 Bath
Total Square Footage: 3316
Lot Square Footage: 6250
Year Built: 2015
To view the property details follow this link
I started looking at closed rental leases in the area on the MLS and I found 2 rentals that went for $2,800 and $3,500 a month. I believe this is a much nicer property than those rentals and you could get around $3,400 a month.
Here are the numbers with a renter paying $3,400 a month and the owner paying for the remaining expenses. Purchase price $1,149,000 with 20% down ($229,800) at 3.7% interest rate for a 30 year fixed loan. For the depreciation expense I estimated that the improvement would be 50% of the value. I only depreciated half of the improvement value because only half of the units are being used for rental income. Depreciated over 27.5 years.
| PROJECTED CASH FLOW: | ||||
| Monthly | Annually | |||
| Gross Potential Income | 3,400 | 40,800 | ||
| - | Vacancy / Bad Debt | (142) | (1,700) | |
| + | Miscellaneous Income | 0 | 0 | |
| = | Effective Gross Income | 3,258 | 39,100 | |
| - | Operating Expenses | (1,417) | (17,003) | |
| - | Capital Expenses | |||
| = | Net Operating Income | 1,842 | 22,098 | |
| - | Principle and Interest | (4,231) | (50,771) | |
| = | Before Tax Cash Flow | (2,390) | (28,674) | |
| Payment Breakdown & Depreciation | ||||
| Interest Paid | (2,810) | (33,723) | ||
| Equity Added | 1,421 | 17,048 | ||
| Depreciation | 870 | 10,445 | ||
The tenant is paying $40,800 annually and the owner is paying the remaining balance of $28,674 annually as noted in the "Before Tax Cash Flow."
At the end of the first year after adding back the benefits from tax deductions, rental income and added equity the owner will definitely be in a better position.
If you want to learn more about owning real estate contact me.
The information on the Site is provided for educational or information purposes only; it is not intended to be a substitute for professional advice, whether tax, legal, or otherwise. Please consult your tax professional about the specifics of your tax situation. Rents and expenses are hypothetical actual results may vary.
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