You have no doubt been warned about investing in properties with less than 20% down payments. It’s risky they say. There’s no way you can possibly have positive cash flow. Sometimes both those warnings are warranted. However, if you’ve picked the right location, property, and financing, 10% down can be very rewarding.
Let’s use a recent purchase in Boise as an example. A fourplex with 10% down. The cash flow was calculated by taking the gross scheduled annual rent and taking 35% off for vacancies and operating expenses. Cash flow would be about $3,500 a year. But let’s just assume Murphy makes this client a special project. So we’ll say they have no positive cash flow. It’s a break-even property. Still pretty good considering only 10% down, right?
But here’s where it gets fun. The depreciation for this property amounts to about $15,000 yearly. Depreciation is a ‘paper loss’ which accounts for the concept of a deteriorating physical structure. You don’t actually lose that money, but you still get to use it to eliminate any taxes on the property’s cash flow. If there’s any depreciation left after covering your cash flow, you can apply that amount to your day job income, known as ‘ordinary income’.
Break-even into positive cash flow.
So let’s say this fourplex has zero cash flow.
The new owner now has a $15,000 ‘loss’ to apply directly to his day job income of $60,000 a year. Simply put, this means that before he even begins to fill out his tax return, his $60,000 income is now only $45,000. Pretty cool, eh? You want to know how in the world this relates to cash flow, right? If his income tax rate, counting both state and federal is about 35% or so, he just pocketed $5,250!
What if he doesn’t want to wait for next April to realize that cash flow? He tells his employer to increase the exemptions used to calculate his periodic paycheck. His tax accountant can tell him how many exemptions would make sense. His ‘take home’ pay now increases significantly. And now his cash flow shows up in every new paycheck.
10% down – positive cash flow in my paycheck every week. Dumb like a fox.