Property Values Increase
Values of single family homes continue to increase in the Northern Atlanta suburbs of North Fulton, Gwinnett, Forsyth and  Cobb. I think we as property owners are at the right place and the right time.

Staff News

Robert Fowler, Broker celebrated 26 years in the residential property management business. Robert attended the state conferance of the National Association of Residential Property Managers in late May.
Mary Ann successfully operates the latest version of Yardi Property Management software.
 

Rental Property Benefits
What kind of return am I getting on my investment property? An owner asked me that question recently, prompting me to do a little analyzing to see if I could come up with an answer.

First of all, the return should be based on an owner’s equity, or the difference between the market value and the outstanding loans. However, some owners say the base should be what they could get after selling the property, paying commissions, vacancy loss while on the market, fix-up costs and paying Uncle Sam capital gains tax on the profit. (Yes, we’re all holding out for elimination of the capital gains tax.) If you look at it this way, the base is a lot lower than just using your equity (and your return will be higher).

OK, let’s just use equity as our basis for this example. Let’s say the property value is $100,000 and we have a first mortgage of $80,000 for an equity of $20,000. So the owner has $20,000 invested into this property. Or maybe, the amount invested was smaller, the house has just appreciated and the loan balance got smaller, growing the equity.

The returns I considered fell into four categories: Cash Flow Property Appreciation Debt Reduction Tax Benefits These are the financial returns I came up with. There are many non-financial benefits to consider, but let’s just stay with the financial aspect.

Cash Flow is the rental income less all expenses including your loan payment, taxes and insurance, maintenance expenses, lease and management fees, etc. It may be equal to your owner’s check less your mortgage payment. What you have left over is cash flow. With some recently acquired properties with large loans there may not be any cash flow. Some of our owners have paid off their mortgages and have high cash flow. In the example, I came up with only $200 positive cash flow for the year. Divide that by your base (equity) and you have a return from cash flow of 1%.

Property Appreciation is how much the market value of the property appreciated in one year. In the Atlanta area, houses appreciated around 5% recently. Let’s say our house was worth $96,154 at the beginning of the year and appreciated 4% or $3,846 to be worth $100,000 at year end. Our return by appreciation is $3,846 divided by our equity of $20,000 equals 19.2%. OK, that’s more like it!

Debt Reduction is how much the mortgage principal is reduced in one year. 15 year loans reduce principal more than 30 year loans but result in less cash flow because of the higher payments. Let’s say for our example that we have a 30 year loan and the principal was reduced $500 during the year. $500 divided by our equity of $20,000 is 2.5%.

Tax Benefits are Federal and State income tax savings that an owner enjoys by being able to write off depreciation and business expenses of the rental property against ordinary income. If an owner’s adjusted gross income is less than $100,000, they should be able to take these deductions. Check with your CPA. In our example, after considering the mortgage interest, depreciation and all other expenses, the tax write off on Schedule E should be $9,500 for a tax saving of $3,315 if the owner is in the 33% tax bracket. The tax savings of $3,315 divided by our $20,000 equity is a 16.5% return.

OK, let’s summarize our return on equity for this example.
Cash Flow 1%
Property Appreciation 19.2%
Debt Reduction 2.5%
Tax Benefits 16.5%
Total Return on Equity 39.2%

These are rough numbers used to get an idea of “Return on Equity” and to inform owners of these different types of returns. The numbers will change by property and circumstances. Of the few properties I calculated, return on equity ranged from 9.6% to the 39% in our example.

Thanks, For the Owner Referrals! Your referrals are the best source of new business we have and we really appreciate it!

Keeping in Touch is Easy
With our user friendly Voice Mail system, it is always easy to get in touch with us! By simply calling our office at 770-663-8695, you may leave any of us a message. Feel free to give us a call. Because we are out managing your property , this allows us to get back with you on a timely basis. We can also be reached in our office after 9 AM at 770-663-8695.