Money, Time, Labor and Rental Income Question. (Real Estate 101)

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?

Ok, I’m going to give this one last spin and then let it die if nobody responds.

**Ok. Let’s assume that when you say that, you mean the mortgage is being paid for at the 30-year rate, AND you’re putting $6,000 into your pocket by renting it or otherwise making income from it.
I will assume that you receive $500/month in profit, monthly. I will further assume that you are an investor who takes a long-term view and puts his surplus income into stocks. Over the very long term, the S&P 500 set of stocks seem to offer about a 11.1% annualized return on investment. $500/month put into average stocks would thus yield $1433186.37 in 30 years.
To sum up, Mr. Doe lost $14,400 in income and immediately gained $9,000 in equity. Net cost of $5,400 to Mr. Doe in the first year.
Mr. Doe will be up the money he earned from the 500/mo he made, that he invested as well, 1433186.37. Also, the house will have appreciated at the rate of inflation, 2%. It will be worth $311,426.74 by then.
His total payoff from this investment of $5,400 in 2002 dollars will have been $1,744,613.11 in 2032 dollars.
If he had simply put $5,400 in stocks that earned 11.1% for 30 years, he would wind up with $151,326.71.
To put it another way, he would be UP a little under $1.6 million after 30 years if he does this versus not doing it.
Bear in mind that there are a number of risks here, but this is the average.
It will be a bad deal whenever he could have earned more by putting $5,400 in stocks ($151,326.71) vs becoming a property owner in this fashion.
For the record, an investment that paid $630 or less per year for $5,400 is a bad deal assuming you have the option of putting it into the stock market instead.

Bear in mind that even if cash flow is zero, the investment is still returning something - namely, the amount of principle that is being repaid each month by the money received from the tenant.