Buy a Rental: Cash Formula

said on August 23rd, 2012 filed under: Negotiating, Real Estate Nuts and Bolts

This is the first of three formulas for buying a rental property.  In this version the rental is purchased with cash.

Here are the assumptions:

  • You have $166,000 sitting in a non-productive instrument, perhaps a savings account, mutual fund, low-yield bond, or your funds are in a CD that is getting ready to mature, or the cash is buried in a coffeee can in the back yard.
  • The tax benefits or liabilities are not computed (see your CPA or tax lawyer).
  • The purchase price and  rent are hypothetical and will vary by location.
  • The property will need some fixing prior to renting.
  • Property taxes are based on the California ad valorum 1% rate plus a bit of miscellaneous supplements.
  • Closing costs are customary for northern California for a cash purchase and include inspections.
Cash Purchase Rental Formula
Purchase Price 150,000
Closing costs 3,000
Fixup and holding costs 13,000
Total Cost 166,000
Rent earned on the property 1,430
Monthly property taxes 150
Monthly property management 95
Monthly insurance 85
Monthly maintenance 100
Total monthly expenses 430
Monthly net (rent minus expenses) 1,000
Annual Gross 17,160
Annual Net 12,000

Summary:  If you can buy the property for $155,000, fix it up for $13,000, and get $1430 rent, you will net $1000.00 per month.  (Remember, income taxes on the net are not computed in this formula).

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To find out more about real estate in the Golden Hills of the Sierras, just call Bob at (530-906-1023) or CJ at (530-9064715) or email us at [email protected] or [email protected]

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