Here’s an actual account of net profit that one of my clients made by just buying and holding a property in the last two years without making any significant improvements.
My client was renting in 2012, and I advised him to buy a short sale for $365,000 at the very end of the year in December. Two years later, he sold it for $485,000, making a total investment net gain of $94,000. Here are the details:
Purchase Sale Price: $365,000
Down Payment: $73,000
Interest Rate: 3.375%
Loan Amount: $292,000
Monthly P&I Payment: $1,291
Principal Paid Over 2 Years: $19,388 (In addition to the minimum required of $11,644, he paid an extra $7,744 by adding $323 per month)
Interest Paid Over 2 Years: $19,338
Transaction Expenses: $26,320
Common Charges Over 2 years: $19,344 ($806 per month included heat)
Net Proceeds After Sale at $485,000: $186,000
Actual Net Gain (accounting for down payment and principal paid Over 2 years): $94,000 plus the additional tax savings on mortgage interest expense and property tax deductions.
Please note my client does not have to pay capital gains taxes if he occupied the property for two years.
Also, many analysts would say my client had additional expenses consisting of common charges and the interest expense. This cost of $38,000 was his true out-of-pocket expense to live in the condo for 2 years. This cost can be compared to what it would have cost him to rent the same property for two years, which would have been at least $72,000. This comparison has to be made since most people don’t live in luxury condos for free.
This analysis also assumes the down payment funds came from a savings account or similar account where interest would have been minimal. This lost interest has not been accounted for in this scenario. Please call with any questions, 203-570-2096.