Real Estate Investors

The North Dallas real estate market provides an excellent opportunity for purchasing real estate investment property because of the high demand by renters associated with the relatively high ratio of income to purchase price or capitalization rate compared to other areas. In fact, I personally have purchased 3 rental properties in Frisco and McKinney over the last couple of years which have provided an excellent return and a great way to diversify my investment portfolio.

Investment property provides four general ways of providing cash flows for the investor.

  • Net income (rent less expenses)
  • Income tax depreciation ( Tax write-off for split over 27.5 years (even though property usually appreciates).
  • Principal paid on the loan.
  • Appreciation or increase in market value.

I manage my own real estate investment properties, and I find my effort is divided into three main areas.

  • Renting the property to tenants
  • Maintaining the property
  • Record keeping and collecting the rent.

Mortgages for investment properties generally require 20% to 25% down. It is also possible to purchase an investment property using a self-directed IRA that allows real estate investments (I purchased one of my investment properties using a self-directed IRA with Equity Trust).

Example of First Year Investment Property Cash Flow and Return

Investment Assumptions

  • Purchase price of $220,000
  • 30 year mortgage with 20% down at 4.5% interest
  • Monthly rent of $1,600 with 11 month occupancy rate
  • Yearly maintenance reserve of 1% of purchase price
  • Marginal income tax rate of 25%
  • Real estate appreciation rate of 3% per year

Acquisition Cost

Purchase Price $200,000
Mortgage Amount $160,000
Net Investment $40,000

Before Tax Cash Flow

Rent $17,600
Insurance $1,000
Property Tax $4,500
Maintenance $2,000
Mortgage Payment $9,728
Net Cash Flow $372

Tax Shelter

Please note that for most people, the IRS defines real estate income tax deductions as Passive Activity Loss that can only be used to offset current or future Passive Income. Please contact your tax professional for more information.

Tax Depreciation $7,273
Insurance $1,000
Property Tax $4,500
Maintenance $2,000
Mortgage Interest $7,200
Total Write-Offs $21,973
Income Tax Reduction $5,493

Increase To Net Worth

Before Tax Cash Flow $372
Tax Reduction $5,493
Mortgage Principal $2,528
Property Appreciation $6,000
Total Return on Investment $14,393
Percent Return on Investment 36%