It’s Monday again, but it’s not all bad. If you haven’t seen it yet, check out my Overheard In The Break Room animation to get a little laugh in the office.
This post is a follow up to my Fundamental Investment #8 – Real Estate. In 2010, we decided to look for a small investment property while the market is still down and found a foreclosure condo. This condo needed new paint, blinds, and some minor work, but overall it was in good shape. We’ll rent out this condo for now and will most likely convert it to personal use later on.
We put in an offer and it was accepted by the bank at 140k. I cleaned up the place, put on a new coat of paint, and just rented it out recently. Here is the monthly cash flow on this condo.
Rental + $1,050
Mortgage – $570 (principle + $120, interest - $450)
HOA - $320 (This is high, but we pay for location. Also, there will be less work and I will try to manage this property myself.)
property tax - $256
insurance - $35
Total cash flow = 1,050 -450 – 320 – 256 – 35 = -$11
Assuming no maintenance or repair, each month we’ll need to put in $11. This is not too bad because soon, the amount toward principle will go up. In a year, we won’t have negative cash flow anymore.
In addition, when we file our taxes in April, we can take depreciation on the property. I’ll describe it very briefly. Depreciation is an IRS tax deduction that you can take on investment property. In our case, a rental condo can be depreciated over 27.5 years. This means that each year, we can deduct $5,090 (140k/27.5) from our taxes.
Some problems: The HOA fee is very high for this property. We’ll work with the HOA to at least keep it stable. Property tax is also high for this condo. I filed an appeal to lower the tax, but I’m not optimistic. I’ve only heard of rejections and the tax keeps going up. The rental income is a bit low at this time. I’m pretty sure I can get $1,100, but I’m renting to someone with a very stable job and they’re planning to stay for 2 years so I am hoping it will be smooth.
5 years projection: Rent $1,200. Amount toward principle will be around $150.
Cash flow in 5 years = 1,200 – 420 – 320 -256 – 35 = $169
The other costs will probably increase a bit too, but this still looks better than -$11. We didn’t take vacancy rate into account in this calculation.
If we add a bit to the principal every month, the cash flow will improve much quicker. Should we pay down the principal on this mortgage? I am not a real estate expert so if you see any problems with the numbers, let me know.
ps. We own this property 50/50 with my brother.