Math help (by Smokowna [MD]) Dec 3, 2018 9:55 PM|
Math help (by Robert J [CA]) Dec 4, 2018 4:40 AM
Math help (by Marv [IL]) Dec 4, 2018 5:24 AM
Math help (by David [NC]) Dec 4, 2018 5:27 AM
Math help (by David [NC]) Dec 4, 2018 5:32 AM
Math help (by LindaJ [NY]) Dec 4, 2018 5:34 AM
Math help (by Deanna [TX]) Dec 4, 2018 5:48 AM
Math help (by Bit [IN]) Dec 4, 2018 6:33 AM
Math help (by Smokowna [MD]) Dec 4, 2018 7:39 AM
Math help (by RathdrumGal [ID]) Dec 4, 2018 8:02 AM
Math help (by Landlord ofthe Flies [TX]) Dec 4, 2018 9:33 AM
Math help (by Deanna [TX]) Dec 4, 2018 11:44 AM
Math help (by Smokowna [MD]) Dec 4, 2018 6:22 PM
Math help (by Ray-N-Pa [PA]) Dec 5, 2018 7:53 AM
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Math help (by Smokowna [MD]) Posted on: Dec 3, 2018 9:55 PM
If you had a shack that would sell for 300, But you had to pay fees to sell it and then you were taxed on the sale
....but after the sale you had some mystery number left over.....Say $230,000.
How would you calculate what that 230 should earn you vs. if you kept the shack and it earned $ 24,000 per year.
The reason I'm not being clear is because I don't know how to phrase the questions and I don't instinctively look at the scenario.
What I would like to do is have a base line established.
"The Shack will clear $24,000 per year after expenses, which means it should not be sold for any less than __________"
Thank you very much
Math help (by Robert J [CA]) Posted on: Dec 4, 2018 4:40 AM
Not enough information on your shack. You cost, time of ownership, amount depreciated, tax bracket, state income tax rate.
With $230K, you could invest in Tax Free Bonds and get a yield of around 4%. That's around $9,000 a year -- a lot less than if you kept your shack with a $24,000 income with some tax shelter offset from long term depreciation. --47.156.xx.xx
Math help (by Marv [IL]) Posted on: Dec 4, 2018 5:24 AM
You calculate the rate of return.
In current case, you have a 230k asset yielding 24k per year. You calculate the rate of return on that.
In any new case you have the same info. You must still get 24k per year to get the same rate of return. --173.15.xx.xxx
Math help (by David [NC]) Posted on: Dec 4, 2018 5:27 AM
Oh I'll take a stab at it with the caveat that you can manipulate the numbers to get whatever answer you want.
It's worth 300K and you are netting 24K so your investment is producing 8% a year. In essence you have 8 cap rate.
(Net income / current market value)
If you sold and netted 230K you'd have to clear and net 18.4K a year on your money to be producing 8% a year.
I am assuming it is owned free and clear. If there is a loan then your money is working harder (theoretically) and your return is higher (but the calculation never seems to take into account the cost of the borrowed money)
If you take the 230K net and bought two houses and financed them what would they net produce?
Could you 1031 the first property into two properties and not pay the taxes on the 300K?
Math help (by David [NC]) Posted on: Dec 4, 2018 5:32 AM
If you looking to provide reinforcement that your property is worth 300K then you say it has a Cap Rate of 8 as it nets 24K. They guy buying says I want a 10 cap rate and says I'll only pay 240K for it. You say the going rate in my area for investment properties is a 7 cap rate so it is really worth 342K and I'm giving you a bargain.
Is that what you looking for? Leverage in pricing the product? --71.217.xxx.xxx
Math help (by LindaJ [NY]) Posted on: Dec 4, 2018 5:34 AM
But a bond/cd is fixed in the amount of money you earn. You can count on it for the term. What you clear on a rental could change (vacancies, repairs, damage) each year. There is also the aggravation factor and the fact it could actual lose its value should you ever want to sell. The more money you can get on that $230K the more risk you face in getting it (which is why you get more)
Who knows what kind of taxes the next administration might bring. So you can estimate the amount you get now, but that could change in a few years. --108.4.xxx.xx
Math help (by Deanna [TX]) Posted on: Dec 4, 2018 5:48 AM
For properties that are sold to investors (like large multis), the formula I see locally is yearly gross x 10 = selling price.
So, in your case, suppose it clears $24,000/year after expenses, taxes, etc, but suppose it grosses $36,000/year. Then the selling price would be $360,000 instead of $300,000.
But if you're selling a sfh, it doesn't matter that it grosses $36,000/year or clears $24,000/year after expenses-- because it's a different buyer's pool, it hinges on what similar places are selling for. So today, it might be $300,000, and this time next year, it might be $400,000, and in five years, it might be $250,000. It fluctuates.
As to whether the $230k-in-hand is more valuable than the $24k/year, a lot of it depends on what I need to do with that $230k. If I'm wanting to invest it, real estate gives me a much better return than many other investments-- in exchange for a bit of work and effort and risk. So if I wanted to use that $230k to buy three houses that clear $12k each, that would make sense. On the other hand, if I had something where that $230k would give me $20k a year in exchange for zero work, that would also be worthwhile to consider-- it might not be exactly as profitable, but the hands-off-ness would compensate for that missing $4k.
But if I didn't have a specific investment vehicle that really appealed to me that I liked better than real estate, I'd let the house continue to produce $24k/year for me... unless there were other factors, like, "I'm tired of this and want to get out of the biz" or "The area is changing and I won't be able to keep getting the rents I'm used to" or "This house is just a magnet for trouble and it needs to go" or "My life is changing and I need to cut back on my distractions". --96.46.xxx.xx
Math help (by Bit [IN]) Posted on: Dec 4, 2018 6:33 AM
I think the biggest question is what you will do with the money compared to keeping the property. I think using the cap rate like 7% or 8%, whatever it is a good place to start if you own it free and clear.
Then if the new investment gives you a better return then you made a better investment or if it is a lower return but less headache, work etc. then it may be worth a smaller return. --74.130.xxx.xxx
Math help (by Smokowna [MD]) Posted on: Dec 4, 2018 7:39 AM
Thank you all very much. I'm reading the replies a few times over.
This is a free and clear house.
David, to answer your question, yes I believe that rule of thumb is what I'm looking for, but not from the stand point of selling it to someone, rather to help me know what it is worth. (It can be said that info is one and the same).
Thank you all for explaining your thoughts. I really learned from all the replies.
Math help (by RathdrumGal [ID]) Posted on: Dec 4, 2018 8:02 AM
This is a Net Present Value question. It is too complicated to explain over this board, but it can be Googled or done on Excel very easily. This will factor in your cost of capital. Basically, it factors in which is more valuable? -- the income stream of $24K a year over 20 years (you will also want to factor in rising rents) versus $300 in your pocket now. --98.146.xxx.xxx
Math help (by Landlord ofthe Flies [TX]) Posted on: Dec 4, 2018 9:33 AM
However, your true rate of return is your net income divided by purchase price, not market price. This should make your rate of return higher. If you kept it, you wouldn't be keeping a house that cost you market price. You don't have that much invested in it. --108.69.xxx.xxx
Math help (by Deanna [TX]) Posted on: Dec 4, 2018 11:44 AM
Oo. Another thing I'd take into account-- how much of your own money is locked up in the building? Suppose you bought it for $100k and spent $50k in renovations and you own it free and clear. That $150k is bringing you $24k/year.
If you wanted to get your original $150k back, you'd sell your house for $300k and spend $70k for the privilege. So that leaves you with $230k. You get your original $150k back, plus an extra one-time $80k bonus, because it's worth more.
But you could have kept your $150k locked up in the form of a house, and gotten $80k spread out over 4 years-- over and over and over again, imagining that rents never rose or fell, and expenses never increased or decreased.
So it becomes a much less persuasive argument--- unless you're in a stage of life where you can't count on having 4, 8, 12, 16, 20 years ahead of you; or you have a better use for that original $150k that's tied up in the form of real estate (and gives you a one-time bonus of $80k); or there's a problem with the real estate itself that makes you wish to rid yourself of it, and the $$ from the sale is just a side issue. --166.137.xxx.xx
Math help (by Smokowna [MD]) Posted on: Dec 4, 2018 6:22 PM
It is an exercise to make certain I'm not asleep at the wheel.
I want to know what is the best use of the money or value. If I don't think about this, I'm like the person that rented their house out for half price and boasted that it was always rented.
Math help (by Ray-N-Pa [PA]) Posted on: Dec 5, 2018 7:53 AM
I can't speak for your niche investment, but around here with my target property.....monthly rent should be about 1% of the asking price for an entry level single family home being sold to a retail buyer.
With the market inflated, that number is closer to 1.33%
So if monthly rent is $1,000 , then the house should sell for about $100,000 in a normal market and about $133,000 in today's market. Taxes and insurance typically take about 30% of the gross.
If your place follows these ratios, then its a question if you feel you can find a better deal else where on a replacement property or if you are alright paying the capital gains on the cash you pocketed. --72.23.xxx.xx
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