LIVE BOZEMAN STYLE

American’s have historically treated homeownership as the keystone of personal wealth and valued it as a bastion of safety and financial security. And, as Uncle Ben from Spiderman would say “with great power, comes great responsibility”. The home is your biggest personal savings bank, growing in value every hour! Did you know according to marketwatch.com Homes in San Jose, Calif., appreciated the most (in the country) in value on an hourly basis — with home values there increasing $99.81 every hour between February 2017 and February 2018… That’s more than seven times larger than the city’s hourly minimum wage of $13.50.” 

How can you put your automatic savings account to use? Your home could be leveraged to provide the opportunity to purchase desired (albeit depreciating) products such as motorbikes, campers, snowmobiles and other expensive toys OR those same funds could be used to help provide a down payment on an investment property that could provide an additional income stream for your family and build your financial health. 

Are you enticed by a foreclosure? A property that has been foreclosed on could be an awesome opportunity, but it may have issues with the systems of the home. If it has not been properly winterized the pipes may be frozen or broken. If the home is an older property where our city has grown around it, it may not be connected to city services. Remember, there are many variables in the “real property” market and not every home is comparable to the next.

Evaluate the potential financial return of the property before making any purchase decisions. The quick and dirty way to evaluate the potential return for a property is a “cash-on-cash” analysis. Determine the amount of cash the you plan to put down. Estimate the potential rental income for one year. Divide the potential rental income (of one year) by the cash amount put down by the investor to purchase the property and a rate of return on the initial cash investment will be calculated. 

For illustrative purposes only:

Imagine purchasing a home for $300,000 with $60,000 (or 20%) down, funds you have drawn from your primary residence. You rent the $300,000 home for $1,800 a month (or $21,600 a year). Your property taxes are approximately $3,000 a year in Bozeman (1% of the homes value) and your mortgage repayment (assuming 4% interest today) is $1,145.80 a month (or $13,740 a year). Your expenses to own in the first year will be at least $16,740 (total monthly loan repayment + tax bill) and your renters will have paid $21,600 in rent to you which means you’ll POTENTIALLY profit just under $5,000 year one. Cash on cash (your down payment amount divided by your annual profit) means this asset could provide an 8% annual return, year one, before appreciation.

That was a lot of jargon, what does it mean? It means there is opportunity for investors in our dynamic market! However, as a financially responsible advocate for your own growth would-be investors must explore all facets of a property before deciding to move forward with a purchase decision, not just asking price or potential rental income. A seemingly competitively priced may not present a positive growth position in your personal portfolio. 

Factors that should be considered before making an investment purchase include:

• Current market value

• Current market rental value 

• How the property will be used

• Cost to improve the property

• Tax advantages

• Loan interest rates

• Rate of return

Understand the cash-on-cash calculation is only a starting point. If the rent procured by the property will not produce a positive cash flow before vacancy (often less than 1% in Bozeman) and costs of ownership, the property will not be a good investment at the current asking price. However, if the basic cash-on-cash return is competitive in the properties market, it is worth moving forward with the evaluation process.

Working with your Certified Personal Accountant (CPA), the property should be evaluated for its potential value in your overall portfolio. The insurance and maintenance costs must be considered as should the potential tax benefits through bifurcation and depreciation. With all elements assembled on a cost analysis worksheet, the properties performance can be analyzed and the potential return for your personal portfolio calculated. 

 It is critical that a new investor build a solid network of professionals when beginning the investment process. The elements covered here are just foundational principals that must be considered for any purchase decision, but they do not provide all the tools a qualified investor will need to be successful in the real estate market. With a solid real estate agent, Certified Personal Accountant and a great team of construction professional’s personal wealth can be developed in the housing market.