We have been getting a lot of questions from last week’s blog (The Insane Growth of North Redondo Income Properties) since I mentioned that income properties can sometimes be more affordable than single-family homes. The big question: how is a higher priced income property more affordable than a single-family home?
This blog post will break down the numbers of affordability between the two types of properties to show you how it can be more affordable. If you are new to South Bay income property, hopefully this will open your mind on affordability and wealth creation in real estate. Please note I am not a financial advisor, lender, or a CPA. The numbers provided below are for example purposes only, and you will want to confirm the details for your own personal scenario with the proper professionals.
Below I have taken two examples (or options to a buyer) from the MLS area 152 known as the “South Villas” of north Redondo: 1) a three bedroom/two bathroom home just under 1,200 sq ft that is very clean with updated bathrooms, and 2) a completely updated 4-unit property with a three bedroom unit and three two bedroom units…it looks safe to assume that the three bedroom unit is about 1,200 sq ft as well.
Let’s take an example of a young couple looking to buy their first home. They want three bedrooms that gives them room to grow into the home as their family grows in the future. They have a down payment of $375,000 and can afford a $4,000/month payment for mortgage, taxes, and insurance.
Here is the break down between the single-family and the 4-unit income property:
$0 Rental Income
– $980/month property taxes
– $200/month water & common area utilities
– $100/month insurance
– $50/month maintenance reserve
– $75/month gardening service
– $2,600/month mortgage payment ($565,000 at 3.75% over 30-years)
-$4,005 in monthly expenses to own the house
$7,015/month Rental Income (after a 5% vacancy reserve) assuming the couple moves into a 2-bedroom unit as the 3-bed is not needed yet
– 2,000/month property taxes
– $300/month water & common area utilities
– $200/month insurance
– $200/month maintenance reserve
– $75/month gardening service
$4,240 Net Rental Income after Property Expenses
– $7,570/mo mortgage payment ($1,500,000 at 4.5% over 30-years)
– $3,330 in monthly expenses to own the income property*
*while living in one of the two-bedroom units
As you can see, if the buyer can sacrifice the need to have a house to themselves and does not mind making a call to a plumber or electrician (we have plenty of great referrals) on occasion, then the income property can be more affordable by a whopping $675/month! That is about $8,100 yearly savings to your bottom line.
To take it a step further, amortization, aka paying your loan-down, is larger with the income property. On the single-family loan, your first payment pays the loan down by $850 which would come out to about $10,200 in the first year. With the income property, the larger $1.5 million loan has a first month pay-down of $1,975 or about $23,700 in the first year. You are paying down larger amounts of debt faster, with a lower payment as your tenants are doing much of the heavy lifting!
And if you were to assume a 3% inflation rate or appreciation on both properties then the income property clearly wins. The single-family in 30 years would be worth $2.3 million, and the income property would be worth $4.6 million.
The decision to purchase an income property can be a retirement plan in its own right, and down the road you can move out completely and it will cash flow as rental rates continues to increase. I will refrain from getting into the calculations of depreciation, rent growth, and cash flows…but those benefits make the income property even more worthwhile. It is “hyper-growth” to your real estate portfolio. If you are interested in the depreciation, rent growth, and cash flow details, then give me a call. We have our eyes on a couple income properties currently that could be a great fit for a savvy buyer.