Overview
In February 2024, our client embarked on a venture that not only promised a stable return but also provided quality housing for those in need. We acquired a property at San Leandro, CA for $960,000. This investment was strategically planned to optimize the property’s income-generating potential while benefiting from the security offered by the Section 8 housing program. As of today in August 2024, the property value is $1,390,000 which means the property increased in value for $430,000 within six months.
Financing the Purchase
To finance this investment, we secured a conventional loan of $766,550 with an interest rate of 6.625%. Our commitment was solidified on February 1, 2024, when we closed on the property, eager to transform it into a profitable rental space.
Strategic Utilization and Rental Strategy
Our strategy was multi-faceted, focusing not just on renting out the main living space but also on maximizing the potential of every square inch of the property:
- Main Rental Unit: Shortly after purchase, we placed a tenant under the Section 8 voucher program. The unit, which promises comfort and safety, fetches a monthly rent of $4,100. This not only guarantees us a steady income stream but also aligns with our goal of providing decent housing to those who are most in need.
- Parking Space Rentals: Recognizing the value in every part of the property, we turned our attention to the two car spaces available. Each space was rented out for $270 per month, adding an additional $540 to our monthly income. This strategy not only maximized the property’s earning potential but also efficiently utilized the available space.
- Garage Storage Space: Additionally, we capitalized on the extra garage storage space at the back of the house. This area, often overlooked in rental properties, was transformed into a rentable storage unit, contributing significantly to our revenue.
Market Valuation Update
According to Redfin, the estimated sale price of the property as of today ranges between $1.17 million and $1.39 million. This substantial increase in value, in just a few months, highlights the successful nature of our investment and underscores the potential for significant capital gains in addition to the ongoing rental income.
Financial Performance and Impact
To calculate the Internal Rate of Return (IRR) for this scenario where the house is initially worth $1,390,000 and the annual net rental income starts at $55,630 with a 3% annual inflation rate over a 10-year period, let’s break down the calculations:
- Initial Setup and Assumptions
- Initial House Value: $1,390,000
- Initial Investment: $193,450
- Starting Annual Net Rental Income: $55,630
- Calculate Rental Income Growth
The annual rental income is adjusted for inflation at a rate of 3% annually:
- Assume Property Appreciation
For simplicity, we’ll also assume the property appreciates at an annual rate of 3%, similar to the inflation rate applied to the rental income:
- Cash Flow Calculation
- Year 0: -$193,450 (initial investment)
- Years 1-9: Adjusted rental incomes
- Year 10: Adjusted rental income for Year 10 plus the sale of the property at its appreciated value.
For the 10-year investment scenario with the given parameters, the following results are obtained:
Future Property Value in 2034:
- After appreciating by 3% annually for 10 years, the property’s future value is estimated to be approximately $1,868,044.
Internal Rate of Return (IRR):
- The calculated IRR for this investment scenario is approximately 41.93%.
Detailed Calculation Steps:
Future Property Value Calculation:
- Starting from $1,390,000, the property appreciates at a rate of 3% per year for 10 years:
Cash Flow Breakdown:
- Year 0: Initial investment of -$193,450.
- Years 1-9: Annual rental income adjusted for a 3% increase each year, starting at $55,630 and increasing to approximately $74,051 by Year 9.
- Year 10: The combination of the last year’s adjusted rental income (approximately $76,272) plus the sale of the property, totaling approximately $1,944,316.
IRR Calculation:
- The IRR of 41.93% is determined by solving for the discount rate r that makes the Net Present Value (NPV) of all these cash flows equal to zero:
This very high IRR reflects a strong return on investment, demonstrating the combined benefits of steadily increasing rental income and substantial property appreciation over the decade. This investment scenario is financially attractive given the assumptions, showcasing robust income potential and capital gains.
Conclusion
This investment at San Leandro is a prime example of how strategic planning, innovative use of space, and a focus on community welfare can coalesce into a successful real estate investment. By diversifying the rental options and focusing on both residential and supplemental income streams, we have not only bolstered our financial portfolio but also provided valuable resources to the community.
This case study underscores our commitment at Kitactical Real Estate to innovative investment strategies that meet investor goals while supporting community development. Whether you are new to real estate investment or looking to expand your portfolio, we invite you to join us in finding unique opportunities for growth and impact.
Explore Opportunities with Us
Ready to transform your investment strategy? Contact Kitactical Real Estate today at 415-619-4305 and email us at Info@kitactical.com and let us help you navigate your real estate investment journey with confidence and success. Visit our website or call us to schedule your personalized consultation and discover how you can achieve similar results.
Kitactical Real Estate
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