South Bay Homes and Real Estate

This morning I was showing a Torrance duplex to a bright young couple, Michelle and Ryan. They are well educated, gainfully employed South Bay residents eager to own a rental property. They are smart to consider a duplex, or a two-on-a lot as a long term wealth building strategy.

I love the business of rental property in Torrance and the South Bay! Say what you will about bad tenants – I’ve had my share – and the headaches of maintenance. Whatever the reason, I love it and it suites me well. Read on to learn if owning rental property in Torrance, CA, may be right for you!

But Michelle and Ryan were not well versed on the financial benefits of investment property ownership. In fact, they were glaringly naïve about the long-term value that was staring them in the face. They seemed pre-occupied with purchase price (we were shopping foreclosures, short sales and REO’s in Torrance). They were acting on the solid advice of a trusted relative, but had not grasped the enormity of the long-term opportunity O.K., perhaps I overstated, but stick with me.

Blinding Glimpse of the Obvious!

We ended our tour at a Torrance Starbucks – to review the homes we’d seen. Michelle asked me to recap the purely financial benefits of investment property and my response, which took much longer than any of us anticipated, hit them like a “blinding glimpse of the obvious”! Here’s what (I think) I said:

“I have W-2, 1099 and rental income that I want to spend in tax-smart ways, to keep more of what I earn. Currently, my rental income exactly covers the real estate expenses I incur. That is, there’s virtually no positive cash flow from the business.”

“So why,” they asked, “is that appealing?”

Let me count the ways:

1. Let’s think of this Torrance duplex as a business. Most expenses incurred in real estate businesses are tax deductible. So, after it’s all said and done – there are more deductions than expenses… Some call it the “gift from the IRS Gods.
2. Your personal equity in the business grows each year by the amount the renter pays down your mortgage balance and by the amount the home appreciates in value (crazy significant over time). Further, the rent is pegged to inflation, so there WILL be positive cash flow in the future…increasing rents vs. mostly fixed costs.
3. On this $400K duplex, in Year 1, you will earn $36,000 in rent along with $5,000 in equity increase from principal pay-down and $12,000 in equity increase from appreciation (3% average), a depreciation deduction which will net you $5,250 in reduction in taxes ($400,000/27 year straight-line x 35% marginal tax rate)…for a total of $58,250 “Gross Income” from your business.
4. You will incur $36,000 in expenses to service debt, pay property taxes, and to manage, maintain and repair the home. And, since these expenses are deductible, you will incur no income tax expense on this business.
5. What’s not to love, I told them, about a business that nets $12,250 per year ($58,250-$36,000) in Year 1 that Michelle and Ryan can purchase with other people’s money (not politically correct, I know!)…as little as 3% of your own money in some cases!
6. Further, rental revenue and mortgage principal pay-down will increase each year, making the business net more than double in 10 years and more than quadruple in 20 years.”

Rental Property Rundown:

Oh, to be young again. That’s right; this duplex business you buy today will net you as much as $50,000 per year in Year 20. Then, how much fun will it be to celebrate the mortgage burning when your tenant makes that final payment for you?

Mike “Rocky” Rockwood sells residential and income property in the South Bay cities of Manhattan Beach, Hermosa Beach, Redondo Beach, Torrance, Rancho Palos Verdes, Rolling Hills, Rolling Hills Estates and Palos Verdes Estates.