Posted by Nate on March 10, 2001 at 06:48:21:
Even with depreciation, this is still a bad deal at $489,000. If your depreciation deduction were $17,781 per year, and you are in the 31% tax bracket (who knows, maybe it’s higher or lower, but work with me here for the sake of example) then the value of that deduction is $17,781 * 0.31 = $5,512.
Your NOI is $37,800. Let’s assume (again for the sake of an easy example) that you paid cash for the property, so your before-tax cash flow is also $37,800 – there’s no debt service.
Your after tax cash flow in the 31% tax bracket would be $37,800 * (0.69) = $26,082. If you add back the tax benefit from depreciation, your after tax cash flow would be $31,594. If you paid $489,000 for the property, your net after-tax cash on cash return would be $31,594/$489,000 or 6.5%. You could get a bank CD that pays that much with no risk at all. It would be silly to take all the risk of owning an apartment building for the same return.
Hope that’s a little bit clearer.