The Deal: A Mixed-Use Commercial Building is in pre-development. You're interested in two condominium units in the building as it is in an up and coming Metropolitan area with a pre-construction cost of $350,000 each requiring 20% down. Once construction is complete, the value will increase 30% reflecting it's retail cost.
Your Play: Sell one condominium for a capital gain and hold one condominium for long-term rental.
What we know:
$700,000 pre-construction cost
$140,000 down payment cost
$560,000 Hard Money Loan w/ 7% interest ($39,200)
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Pre-Deal Balance Sheet
Assets:
Cash $140,000
Liabilities:
Owner's Equity:
Common Stock $140,000
Net Worth: $140,000
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Post Deal / Post Loan... Construction underway
Assets:
Current Assets:
Cash $0
Fixed Assets:
Condominium 1 $350,000
Condominium 2 $350,000
Total Assets: $700,000
Liabilities:
Notes Payable: $560,000
Total Liabilities: $560,000
Owner's Equity:
Common Stock: $700,000
Net Worth: $140,000
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Post-Construction, Condos appreciate 30%
Assets:
Current Assets:
Cash $0
Fixed Assets:
Condominium 1 $455,000
Condominium 2 $455,000
Total Assets: $910,000
Liabilities:
Notes Payable: $560,000
Total Liabilities: $560,000
Owner's Equity:
Common Stock: $910,000
Net Worth: $350,000
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Condo 2 sold for Retail ($455,000)
Assets:
Current Assets:
Cash $455,000
Fixed Assets:
Condominium 1 $455,000
Total Assets: $910,000
Liabilities:
Notes Payable: $560,000
Total Liabilities: $560,000
Owner's Equity:
Retained Earnings: $455,000
Common Stock: $455,000
Total Owner's Equity: $910,000
Net Worth: $350,000
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Hard Money Loan Partially Paid off w/ Cash in Hand: $455,000
Assets:
Current Assets:
Cash $0
Fixed Assets:
Condominium 1 $455,000
Total Assets: $455,000
Liabilities:
Accounts Payable: $39,200 (7% interest categorized as an expense)
Notes Payable: $105,000
Total Liabilities: $144,200
Owner's Equity:
Retained Earnings: $0
Common Stock: $455,000
Net Worth: $310,800
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Refinance with HEL for $144,200 @ 4.9% interest over 30 years and pay back hard money loan.
Assets:
Cash $0
Fixed Assets:
Condominium 1 $455,000
Total Assets: $455,000
Liabilities:
Accounts Payable: $7,066 (4.9% interest categorized as an expense)
Notes: Payable: $144,200
Total Liabilities: $151,226
Owner's Equity:
Retained Earnings: $0
Common Stock: $455,000
Net Worth: $303,774
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Condo 1 is now beings leased, everything is stabilized….
Balance Sheet after Month 1 of Renting
Assets:
Cash $2,250 (Net Operating Income: $860/m)
Fixed Assets:
Condominium 1 $455,000
Total Assets: $457,250
Liabilities:
Accounts Payable: $1,390 ($765 HEL, $250 Property Taxes, $25 Insurance, $350 Maintenance)
Notes Payable: $143,435
Total Liabilities: $144,825
Owner's Equity:
Retained Earnings: $2,250
Common Stock: $455,000
Total Owner's Equity: $457,250
Net Worth: $312,425
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Balance Sheet after One Year of Renting
Assets:
Cash $27,000
Fixed Assets:
Condominium 1 $455,000
Total Assets: $482,000
Liabilities:
Accounts Payable: $16,680
Notes Payable: $135,020
Total Liabilities: $135,020
Owner's Equity:
Retained Earnings: $27,000
Common Stock: $455,000
Total Owner's Equity: $482,000
Net Worth: $346,980
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Balance Sheet After 2 years Rent. Rent increased to $2,325 for year 2.
Assets:
Cash $54,900 (Year 2 Net Operating Income: $935/m)
Fixed Assets:
Condominium 1 $455,000
Total Assets: $509,900
Liabilities:
Accounts Payable: $33,360
Notes Payable: $125,840
Total Liabilities: $125,840
Owner's Equity:
Retained Earnings: $54,900
Common Stock: $455,000
Total Owner's Equity: $509,900
Net Worth: $384,060
…and so on
Although not real, this is just an example to illustrate what I naturally do.
I understand how rough this is as I didn't include depreciation and all that fun stuff, but do any of you brainstorm storm like this when trying to see the big picture?
I'm over analytical at heart, and even though this only takes a few minutes to whip up, I'm still curious what everyone else does and if there are more efficient alternatives.
