So the question is how to determine how much money is made from a particular real estate deal.
So far, the question seems complicated enough to me that I would like to ignore the tax angle. I’m aware that taxes can dramatically change the situation, but let’s just pretend that they don’t exist for now. (happy happy joy joy:))
So here’s the scenario:
John Doe makes $800/week at his job. He gets no vacation or benefits. He only gets paid when he works, but he is guaranteed the $800/week for as long as he is willing to work.
Mr. Doe has saved up some cash and is looking to buy a house for investment. He stops working, finds a house to buy, fixes it up and is in this situation at the end of the deal after he re-finances the house:
[1] During the renovation, he was able to pay for his bare minimum living expenses with the money he saved.
[2] He was able to pay for all the repairs. (labor and materials)
[2] He has all of his start-up capital back.
[3] He worked 18 weeks without getting paid.
[4] The house is in perfect condition with all new everything. (plumbing, electrical, roof etc…)
[5] The house is now valued at $180,000, but there is only 5% equity left in the house. (30 year mortgage)
[6] The house has a positive cash flow of $6000/year.
So was this a good deal or not? More importantly, where is the line between a good deal and a bad deal?
If it’s a good deal, then how much less cash flow could the house pay off before it was no longer or good deal?
…and of course…
If it’s a bad deal, then how much more cash flow would it need to be worth it?
How do you value the $180,000 (in today’s dollars) that the house will be worth in 30 years?
If you feel that I’m not challenging you with these questions, then go ahead and assume that there are three John Does. (Sr., Jr., and III) Is the equation different for the 60 year old John Sr. than it is for his 40 year old son or 20 year old grandson?