Math Formulas
Is there a math formula that can tell you how long it will take to re-coop repairs on a property?
Is there a math formula that can tell you how long it will take to re-coop repairs on a property?
Buy it, fix it, sell it.
But it, fix it, rent it out.
Borrow all the money from others. I do not have a formula other tan buy at 70% of appraised value minus fix up and closing cost.
Good LUCK and Thank You
Hope this helps some
Ted Jr
That really depends on the amount it took to repair it and the amount you put into purchaseing it.
Thanks Ted and esuccess for responding esuccess responds is more to what I'm looking for. Is there a calulator on the web for that type of figuring? I've tried to figure it out but I'm getting fustrated..looking for a simple way of doing the math.
Quote:Is there a math formula that can tell you how long it will take to re-coop repairs on a property? Tj6155,
No, there is not an absolute formula. Instead it depends upon your exit strategy or your investment approach.
If you repair (or rehab) then flip, your recovery period is as long or as short as your holding period. You recover your repair cost when you sell.
For a long term rental, repairs are an expense that offset rental income. A portion of your repair expense is recovered through lower income taxes when you file your annual tax return. The amount of your recovery depends upon your tax bracket. The balance of your repair expense may never be recovered, except through appreciation when you sell.
If you are really talking about a capital improvement to your long term rental holding (instead of a simple repair), then your cost is recovered through depreciation. The recovery period depends upon the depreciation class and is specified by the tax codes in General Depreciation Schedules.
Tj,
You didn't quite give context so I am assuming that you may be repairing a property that you are purchasing.
If so you need to make up an operating proforma that has rental income less expenses (loan service, property taxes, insurance, etc.). The result will be your monthly cash flow (pre-tax). If you take your repair estimates and divide by your monthly cash flow, this will tell you how many months it will take to do repairs.
There is a tool in the MYTOOLs section of your myTCI page. It is called the PROFORMINATOR. This will help you do the cash flow calculations. You can also do this with a spreadsheet.
I'm strictly a numbers guy so if the numbers don't look good, I don't buy. But I'm confident enough in myself to make an okay deal very profitable. To me, it depends where you got the money from for the repairs. I never and will never use my own cash for any real estate purchase, fixup or whatever. After I borrow the money, I include it in my monthly expenses then figure if I can still make a positive cash flow on the property. If I can, then I'll pull the trigger. On my last two deals, I borrowed home improvement money for house #1, will use some on the property and the rest as d.p. for house # 2. I added the H.I. monthly payment to the expenses of house #2 and it took me out of the rental market by about $50. So, I'm going to lease option and net about $200 a month in passive. So the formula for me is Loan 1 + Loan 2 (and sometimes Loan 3) must be less than gross rents. To be honest, I'm not concerned about how long it will take to payoff because when I refi, the loans will be taken care of and I'll still have the asset for NO CASH! So, that's my formula and I stick by it all the time. Hope this helps!
You could calculate/estimate an investment rate of return and then do a discount cash flow analysis, to see how long it would take to recover your rehab costs----but why bother??
My formula is to do as little rehabing as possible. My purchasers can do the work. That's part of the pride of home ownership. This is a case of less is better, None is best..
My repairs are recaptured with the down payment,the option consideration, or the security deposit.(or close enough for a RE investor.).
My formula is easy:.
Rehab costs= As little as possible.
Quote:If so you need to make up an operating proforma that has rental income less expenses (loan service, property taxes, insurance, etc.). The result will be your monthly cash flow (pre-tax). If you take your repair estimates and divide by your monthly cash flow, this will tell you how many months it will take to do repairs.edmeyer,
I think your response is more accurate if you say the answer will tell you how many months it will take to recover your initial investment.
Your initial investment may include down payment, closing costs, repair costs, and other costs of acquisition. In other words, all of the out of pocket money spent to acquire the property and to place it in service as a rental. Ignoring all other initial investment costs in your approach skews the picture.
Thanks everyone,
This will be the first year we deduct this house on our income tax. From what I've been told you cannot deduct everything in one year but over a 5 year period on your taxes. All reciepts are in a box and waiting for our accountant..Thank God for Accountants..lol. We are getting decent rents for the 2 family property and plan to hold onto to it for at least 5 years or longer depending on the headaches and our health. There is a 500. profit after all the bill are paid on the house monthly. When we bought the house it seemed in decent condition, but needed some TLC. To date that TLC has costed 40k so far and we still have some work to go but we're almost there. Within the year the property value has increased and hopefully will continue to do so. We're hoping the Train comes to that area which for the past several years has been on the table. We are making a profit on the property now after the bills are payed but it's going back into the house along with the loan monies we borrowed from the bank. At least we can deduct the interest on it in the taxes. This was our first investment (it maybe our last) aside from our own house that we live in. It's certainly has been an education for us and I'm sure it will continue to be so. If this house was in a different location it would be worth 1.2 m so I figured there was no way to lose but lately I've been questioning that theory and wondering how long it will take us to re-coop what has been put into the house. By the way we have done most of the labor and Got all the proper permits for work that need it. One thing is for sure there's alot of effort that goes into income property and I've learned alot of stress from tenants when they don't like who's living in the house with them. I'll check out the calculator in my tools. I stink at spread sheets I've learned alot by my daughter now refuses to help me with them. She says keep practicing You'll get one day..i'm still waiting to "Get it" sad but true..
Hi DaveT,
Your underlying question is the one that is probably of more interest to most of www.us--i.e. how long to recover investment cost. My answer was directed at the specific question of recovering only repair costs. The analysis of my own purchases are very much in concert with the points you make.
Regards and Happy New Year to you,
Ed
Quote:This will be the first year we deduct this house on our income tax. From what I've been told you cannot deduct everything in one year but over a 5 year period on your taxes. We are getting decent rents.
When we bought the house it seemed in decent condition, but needed some TLC. To date that TLC has costed 40k so far and we still have some work to go but we're almost there.
I figured there was no way to lose but lately I've been questioning that theory and wondering how long it will take us to re-coop what has been put into the house. Tj6155,
OK, now that you have given us the context behind your question, you really have a tax question that is best addressed in the Tax Forum. Let me give you the "income tax" answer for the question that I think you are really asking.
It now appears that your property is an investment rental, and that you had significant fixup costs ($40K worth?) before you could put renters in place.
In your case, these costs are not repair costs, they are capital improvements. Capital improvement costs are added to your cost basis and are recovered through depreciation. The current recovery period for a residential building structure is 27.5 years. So the answer to your question is that it will take you 27.5 years to recover your TLC costs to date. Usually, the aggregate of everything you do to "fix-up" a property to put it into rent-ready condition is a capital improvement -- even things like painting and cleaning are capital improvement costs when they are part of a larger renovation project.
After you put renters into the property and you are operating an income producing property, your repair costs are expensed on your Schedule E. Repair costs are the money you spend to repair things that break. Examples might be a plumbing repair or an electrical repair.
Maintenance costs are the money you spend to prevent something from breaking or to maintain appearance and good working order. Maintenance costs are also expensed on your Schedule E. Examples might be lawn mowing, a monthly pest control service contract, or the semi-annual checkup on your HVAC.
That thing you heard about the 5-year recovery period probably pertains to business start-up costs for an active business -- rental property is a passive income activity. For an active business activity, startup costs are amortized over a five year period -- and not deducted in the first year of operation. Amortized startup costs cover the things that you need to do to launch your business and include (but are not limited to) things like travel, training, consumable office supplies, business cards, legal fees for incorporation, and filing/registration fees. If these costs are not recovered through amortization, they are added to the "basis" of the business and are recovered when the business is sold. Equipment and machinery purchased for the business is a capital expense and the cost is recovered through depreciation.
This five year recovery stuff does not apply to your rental property activity.[ Edited by DaveT on Date 01/10/2004 ]