At KiTactical Real Estate, our commitment to identifying and enhancing property investments has consistently led to substantial returns for our investors. This case study of a property acquired in 2020 illustrates our approach and the financial outcomes achieved.
Initial Acquisition
In 2020, our client purchased a 2,400-square-foot property featuring four bedrooms and four bathrooms for $1,080,000 USD in Castro Valley, CA. Recognizing its potential, we strategically planned to enhance its value through various upgrades and optimizations.
Investment Strategy
Our strategic approach leveraged the property’s distinctive layout and surplus land to enhance its value and appeal. Specifically, we implemented the following tactics:
- Optimized Space Utilization: We transformed the property into a dual-living setup. The lower level was converted into a private 1-bedroom, 1-bathroom unit. The upper level was reconfigured into a spacious 3-bedroom, 3-bathroom residence, ensuring privacy and comfort for multiple tenants.
- Accessory Dwelling Unit (ADU) Conversion: We pursued the conversion of a segment of the property into an ADU, thereby boosting its rental potential. This project spanned 1.5 years from application to completion, now generating an additional $2,000 USD monthly in rental income.
- Major Renovations: We invested $250,000 USD in extensive renovations to modernize and enhance the property’s functionality. This included $200,000 allocated towards the construction of the ADU and $50,000 for upgrading the kitchens and bathrooms, significantly raising the property’s market value and tenant appeal.
Financial Overview
The financial performance of the property was bolstered by several strategic decisions:
- Down Payment: We committed to a 30% down payment, which was about $324,000, in line with our financial management strategies to optimize cash flow and minimize debt service costs.
- Financing: We secured financing at a competitive interest rate of 2.875%, which enhanced the cost-effectiveness of the investment. The monthly mortgage payment is $4,506 USD.
- Rental Income Optimization: By dividing the property into distinct living units, we maximized its rental income potential. The newly renovated ground floor, now a private 1-bedroom, 1-bathroom unit, commands a rent of $2,200 USD monthly. The upper level, transformed into a 3-bedroom, 3-bathroom suite, collectively generates $3,600 USD monthly, reflecting the high demand for modern, well-located rental accommodations.
Results and Return on Investment
After a holding period of two years, the property not only provided a steady stream of rental income but also appreciated in value due to the improvements made. The project concluded with:
- Annual Rental Revenue: $93,600 USD, after accounting for expenses such as mortgage payments and insurance. This figure is adjusted from the previously mentioned combined rental income of $7,800 USD monthly from both units.
- Resale Value: estimated $1,567,747 USD – $1,700,000 USD, reflecting the property’s enhanced market worth due to strategic renovations and the addition of an ADU. (According to Redfin)
- Line of Credit: A beneficial line of credit worth $300,000 USD, further aiding our investment capacity and providing financial flexibility for future projects.
The calculated Internal Rate of Return (IRR) for this project stood at an impressive 25.56%. This rate is indicative of the robust profitability and strategic success of the investment, marking it as a standout example of real estate investment done right.
To calculate the Internal Rate of Return (IRR) for this investment scenario where the annual net rental income starts at $93,600 and increases by 3% each year due to inflation, and the property’s initial value is $1,567,747 with additional investment for ADU and remodeling, let’s break down the process:
Initial Investment and Setup
- House Value: $1,567,747
- Initial Listed Investment: $324,000 (This could represent a down payment or equity investment, not including the mortgage.)
- Additional Investment for ADU and Remodeling: $250,000
- Total Initial Investment: $324,000 (initial listed investment) + $250,000 (ADU and remodeling) = $574,000
Mortgage Assumptions (Not Included in Cash Flows)
- If there’s a mortgage, it would be taken out of the house value, but for IRR calculation, we focus on out-of-pocket costs and generated revenues. The mortgage details aren’t specified for ongoing payment calculations, so we’ll focus on the initial equity investment and operational cash flows.
Calculation of Rental Income Growth
- Starting Rental Income: $93,600
- Annual Increase: 3%
- Rental Income over 10 Years:
Property Appreciation
- Assuming the property value appreciates at the same rate of 3% annually, let’s also consider the exit value after 10 years:
Cash Flow Calculation
- Year 0: -$574,000 (total initial investment)
- Years 1-9: Adjusted rental incomes
- Year 10: Adjusted rental income plus the sale of the property at its appreciated value.
- Calculation of IRR
- IRR Formula: The IRR is calculated by setting the Net Present Value (NPV) of all cash flows equal to zero:
For the 10-year investment scenario with a 3% annual increase in rental income and property appreciation, here are the results:
Future Property Value in 2034:
- After 10 years of appreciation at 3% annually, the property’s future value will be approximately $2,106,921.
Internal Rate of Return (IRR):
- The calculated IRR for this investment scenario is approximately 25.56%.
Detailed Calculation Steps and Cash Flows:
- Year 0: Initial investment of -$574,000 (down payment + costs for ADU and remodeling).
- Years 1-9: Annual rental income adjusted for a 3% increase each year, growing from $93,600 in Year 1 to approximately $124,700 in Year 9.
- Year 10: The sum of the last year’s adjusted rental income (around $128,441) plus the appreciated property value ($2,106,921), totaling to a cash inflow of approximately $2,235,362.
IRR Calculation Explanation:
- The IRR of 25.56% is found by solving for the discount rate r that makes the Net Present Value (NPV) of all these cash flows equal to zero:
This high IRR indicates a very strong return on investment, factoring in the cash flows from rental income and the substantial increase in property value over 10 years, demonstrating the financial attractiveness of the investment strategy.
- Final Calculation
Using these adjusted cash flows, the software calculated the IRR to be approximately 25.56%. This process involves sophisticated numerical methods such as the Newton-Raphson method or other root-finding algorithms to approximate effectively, which balances the NPV equation to zero.
This IRR reflects a more accurate financial return that considers the increase in rental income over time due to inflation, providing a realistic view of the investment’s profitability over 30 years.
Conclusion
This project underscores KiTactical Real Estate’s expertise in leveraging property characteristics and market conditions to optimize returns. Our approach is meticulous, calculated, and designed to maximize income while enhancing the property’s value.
For investors seeking opportunities that promise above-market returns and strategic growth, KiTactical Real Estate offers the expertise and track record to deliver outstanding results. Contact us today at 415-619-4305 and info@kitactical.com to learn how our investment strategies can work for you.
