Investors: Cheaper Isn’t Always Better In Charleston, South Carolina

I’m going to try to read the minds of the real estate investors for a moment so bear with me.  It has come to my attention in recent weeks that many investors believe that they can purchase a rental property in Charleston or the surrounding areas for $125K or less and make money on it.  While this is a viable model in some cities, I’m going to tell you why it may not be such a great plan for this market.

The Same Bad Plan

I have been researching a few different areas for investors in the past few months and I’m coming across some distinctly similar approaches to rental property ownership.  Here is what I mean, the investor wants to spend less than 100K and seems to think that the house will be a turnkey rental with little or no maintenance plus, they think that the neighborhood would be suitable for a lower to a middle-class family.  To put it bluntly, that is not going to happen here.

Time to Rethink

Now I’m not saying that it could never happen but, the chances are so very slim that I feel perfectly justified saying, “please rethink your strategy.”  I’m one who likes to see things through and If (and I do mean if) you find a property in that price range now, please know that when it comes time to sell it, you will likely be selling at a loss nevermind the depreciation you’re required to take on that business property.  Here is a short example of what I’m talking about.

Scenario #1

You find a rental property for $125K and begin making money on it.  Let’s say that your rent is $800 per month and to keep it simple we start in January.  The income on that property would be $800 x 12 = $9600 per year.  Again, to keep it simple, your depreciation on that property might be $4,000 per year and if you keep it for 10 years that would be $40K in depreciation that would have to be recaptured upon the sale of the property.  If you were fortunate enough to sell it after 10 years for $150K, which I seriously doubt, for a home in this price range in this area.  You would have a gain which may require you to pay capital gains tax AND you also have to recapture the depreciation which means you are now paying tax on the gain plus $40K.  In this example, that would be $150 – $125 = $25K on the appreciation plus the $40K so, $65K.

Capital Gains

At a minimum, your capital gains tax rate on this transaction alone would be 15%.  To calculate, 65K x 15% is $9,750 which is more than 1 year’s rental income without any expenses subtracted.

The Ultimate Best Case Scenario Results In A Loss For You

Let me get straight to the point.  If you were able to retain every single penny of your rental income $9600 per year x 10 years =$96,000 then, after the sale of the property, you would end up with $96,000(rental income) – $9,750(Fed. taxes) = $86,250(net gains).  Then you must account for your original investment of $125K for the purchase of the house. $86,250(net gains) + $25,000(gain on the sale of the house) = 111,250 (total gain) – $125K(original price of the house) = – $13,750.  Yes, this example assumes that you own the house outright.  There are other scenarios that could play out if you leverage your money by financing part of the house but, I’m willing to bet that you couldn’t find one that would cause you to be profitable after 10 years.

There Is Hope

For the record, I have owned rental property and it is no easy task.  But, for those of you who are adamant about utilizing this stream of income, let me give you an example of what works.

Scenario #2… A Better Plan

Again, this is assuming no mortgage or leveraging of investment money.  You purchase a house in one of the better middle-income neighborhoods in Charleston or the surrounding areas.  A typical middle-income house will cost you around $200K.  This house will not be brand new and will likely need some minor work here and there but, compared to that $125K house in the last example, its night and day.  You rent this house for $1700 per month again assuming we start in January and end in December. Here is the calculation.  $1700 x 12 =$20,400  Then take this annual income times 10 years and that would be $204,000.  Assuming the same appreciation of 25K, you sell the house for $225K.  Your annual depreciation would be approximately $6,700 per year again after 10 years your recapture would be $67,000.  Good news.  The same 15% capital gains tax rate applies so… $67,000 (depreciation recapture + $25,000(appreciation on the house) = $92,000 x 15%(min. cap. gains rate) = $13,800.  Let’s do the math a little further.

The Ultimate Best Case Scenario Results In A Gain For You

If you kept every dime of rental income for 10 years you would have $204,000(rental income) – $13,800(Fed. taxes) = $190,200 (net gains) + $25K(appreciation) = $215,200(total gain) – $200K (original price of the house) = +$15,200

Other Tax Benefits Ease The Pain

Now, I have made a lot of unreasonable assumptions here.  There will be many expenses involved in rental home ownership.  If you are trying your hand at this for the first time, please know that you cannot depend on the income from 1 property to enhance your portfolio.  However, if you are in it for the long haul, there are many other tax benefits which could potentially “add” to the profitability of this business.  You are entitled to certain deductions from the income which essentially lowers the taxability of it etcetera.

Do You Want To Make Money Or Not?

My intention is not to dissuade you from becoming a landlord but, you should go into this with your eyes open.  If you know from the start that scenario #1, buying a house at the $125K price point is not profitable, then why would you want to do that?  On the other hand, if you know going in that scenario #2, buying a house at the $200K price point allows for a positive end result, why wouldn’t you want to do that?

More To Consider Than Price

I know there will be some naysayers out there who very likely have had properties of this type and price which saw some profitability.  I would venture to guess that they owned multiple units or perhaps a duplex or two.  My father owned several of this type of property for many years and made plenty of money on them, however, they were not in Charleston, South Carolina and they were very decent with most being in good school districts.  Finding a $125K property in Charleston and the surrounding areas which is decent and in a good school district is a much harder task.

Finding The Sweet Spot

I will leave you with one more thought.  If you consider yourself a good investor and have a few dollars to spend, why not try your hand at scenario #2?  Here is a quick ROI calculation to get you thinking.  This house costs $200K.

$20,400 (annual rent)

– $2,500 (annual prop tax)

-$3,400 (2 mo. vacancy)

– $3,060 (15% R &M +insurance)


$11,440 / $200K = 5.72%

Now, imaging if you leveraged your money and borrowed $100K from the bank.

$20,400 (annual rent)
– $2,500 (annaul prop tax)
-$3,400 (2 mo. vacancy)
– $3,060 (15% R &M +insurance)

– $6,444 (annual mortgage pmt.)

$4,996 / 100K = 4.99%

And, if the stars align, you could have 2 properties, both making almost 5% which would put you at a nearly 10% ROI on that same $200K

Call Me

In the meantime, if I can help you find the investment property of your dreams, don’t hesitate to call, text or email me.

new BCPC p1





Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s