Case Study - The Power of Compound Growth
[Updated Febuary, 2021]
Over the last few years, property prices and rents in Las Vegas have risen sharply. During this time, many clients have accumulated significant equity. How do you take advantage of the accumulated equity without tax consequences? Below is an example of a property at 9473 Borough Park St.
The Property
Below shows the appreciation and rent growth since acquisition in September 2016.
| 2016 Actual Final | Today | Change | ||
|---|---|---|---|---|
| Purchase Price | 180000 | Market Value | 285000 | 105000 |
| Rent (Mo) | 1250 | Rent (Mo) | 1500 | 250 |
| Cash Flow (Mo) | 270 | Cash Flow (Mo) | 466 | 196 |
| Initial return | 5.50% | Return | 9.50% | 4.0% |
| Total Acquisition Cost | 58600 | Total Net Cash Flow | >21000 |
The Plan
Refinance Borough Park, taking out $60,000 in equity, and use this money plus additional cash to purchase another property. The new loan on the Borough Park property will be $190,000 at 3.375% (refinance rate). Below are the projected numbers for the property after refinancing. Note that return and cash flow decreased since the new loan amount is larger than the original loan; however, we will have $60,000 cash in hand after the refinancing closes.
| Assumptions | |
| New note | 190000 |
| Rent (Mo) | 1500 |
| Fees (Mo) | 94 |
| Insurance (Yr.) | 420 |
| Property Tax (Actual) | 1105 |
| Management (%) | 8% |
| Management ($) | 120 |
| Closing Cost (%) | 2.0% |
| Closing Cost ($) | 3,800 |
| Loan Rate (%) | 3.375% |
| Estimated Rehab | 0.00 |
| Loan Term (Yrs.) | 30 |
| Down (%) | 0% |
| Debt Service (Mo) | 840 |
| Vacancy (2%) | 30 |
| Maintenance (2%) | 30 |
| Acquisition Cost | |
| Down Payment | 0 |
| Estimated Rehab | 0 |
| Closing Cost | -3,800 |
| Total | -3800 |
| Recurring Expenses (Mo) | |
| Debt Service | -840 |
| Insurance | -35 |
| Property Tax | -92 |
| Vacancy | -30 |
| Maintenance | -30 |
| Fees | -94 |
| Total | -1,121 |
| Income (Mo) | |
| Rent | 1500 |
| Management | -120 |
| Net Rent | 1380 |
| Return | |
| Cash Flow (Mo) | 259 |
| ROI | - |
A replacement property has not been purchased. However, I ran numbers for a property we currently have under contract as an example.
| Assumptions | |
| Purchase Price | 300000 |
| Rent (Mo) | 1700 |
| Fees (Mo) | 24 |
| Insurance (Yr.) | 450 |
| Property Tax (Actual) | 1248 |
| Management (%) | 8% |
| Management ($) | 136 |
| Closing Cost (%) | 2.0% |
| Closing Cost ($) | 6,000 |
| Loan Rate (%) | 3.000% |
| Estimated Rehab | 9,200 |
| Loan Term (Yrs.) | 30 |
| Down (%) | 25% |
| Debt Service (Mo) | 949 |
| Vacancy (2%) | 34 |
| Maintenance (2%) | 34 |
| Acquisition Cost | |
| Down Payment | -75000 |
| Estimated Rehab (Actual) | -9200 |
| Closing Cost | -6,000 |
| Total | -90200 |
| Recurring Expenses (Mo) | |
| Debt Service | -949 |
| Insurance | -37 |
| Property Tax | -104 |
| Vacancy | -34 |
| Maintenance | -34 |
| Fees | -24 |
| Total | -1,182 |
| Income (Mo) | |
| Rent | 1700 |
| Management | -136 |
| Net Rent | 1564 |
| Return | |
| Cash Flow (Mo) | 382 |
| ROI | 5.1% |
Summarizing
In a little over four years, a property purchased for $180,000 with $270/Mo. cash flow will become:
| Borough Park | New Property | Combined | |
|---|---|---|---|
| Net Cash Flow (Mo) | 261 | 382 | 643 |
| Cash Investment for New Property | -30200 | -30200 | |
| Net Total Cash Flow | 21000 | 21000 | |
| Net Cash Out for New Property | -9200 |