Jarrell property advice needed

[Deepa Jan]

Hi All, First time investor and a newbie here. I am looking at a property in Jarrell, TX for approximately $225. But when I crunch the numbers, it doesn't sound too great. I got the excelsheet from VIP financial online in case if you are wondering how i crunched the number.

My input:

Property value: $225k, Downpayment 20%, Rental income: 1400, Vacancy rate: 5%, Annual Rent increase: 2%, Annual Appreciation rate: 10%

Interest rate 3%

Here is the output: Annual cash flow before tax - negative $2147, Cash on cash return - negative 4%, CAP rate 3.1 %, 5 year after tax return : 22.7%

Here are my questions:

• - Isn't the monthly rent taxable? I live in California. So technically it's 1400 - 28% tax, right ?
  
• - Is this investment worth it ? 
• - New construction and not sure how the appreciation is going to be
• - Should i be looking at other factors as well ?

Really appreciate your input.

Thanks

Deepa

[Will Fraser]

Hi @Deepa Jan, welcome to the BiggerPockets forums!

You're right that this doesn't look very good at all.  In my opinion the key problem here is the Rent to Value ratio of $1,400 monthly : $225k . . . that' way off from where you want it to be.  For this rent value you'd want it to be something like $170k and lower OR have a much higher appreciation rate (which is akin to gambling and not investing since it is a bet on something happening in the future in order to make sense as an investment).

• Surely the NET rent is what is taxable.  Your $1,400 monthly should be reduced by your interest payments, maintenance costs, management costs, and other taxes paid to spit out your net taxable rent of something less than $1,000 probably.
• Worth it:  No way. As a distance investor you have the privilege of investing anywhere, and while I love new construction and we all know Austin is hot, I would not feel compelled towards this skinny deal.
• New construction can be wonderfully low maintenance while you own it early on, and more attractive to potential tenants.  A double bonus!  
• Appreciation is a gamble; a bet.  Buy things that make sense the day you buy them and receive appreciation as a happy bonus along the way.

You're doing well, Deepa!  Keep building these skills and analyzing deals and you'll have some winners!