Any financial Gurus on the site?

[GG54172]

Quick question: Say I purchase a home for $55,000, and I turn around and rent it for $550 per month. Neglecting taxes, insurance, etc, how do I calculate my annual return rate?

 

Is it as simple as (550*12)/55000=12% ?

 

 

I would appreciate the formula. Trying to figure out what rental rate I would have to charge to achieve a particular interest rate. I know that market conditions determine the rental rate, but I am an engineer, and I like numbers I want to know what rate a savings account would have to be to accomplish the same rate of return.

[LilBeaver]

I'm no expert but do not forget to make an appropriate estimate for repairs, maintenance, taxes, etc. Since ANY incidental expense related to it will reduce your return.

 

ALSO, do not forget that there are plenty of tax write-offs that can be associated with this too that can indirectly (but effectively) increase your return rate based on what you will be able to write off (ie pay less taxes).

 

If I recall correctly, (my mom is a real estate agent and we had talked about this a while back) the rule of thumb for setting the rental rate is along the lines of 1.5*mortgage payment +/- a little to adjust for location, condition, what it has rented for in the past (if rented) and whatever else you need to adjust for.

[SilvrT]

I dunno if expecting a return on investment thru rental revenue is a realistic thing ... wouldn't one use the rental revenue to cover the mortgage, taxes, and upkeep and the long-term equity would become the return on investment -OR- a minimal return would be realized on the rental combined to the that of the equity you'd realize in, say, 10 years if you sold the place.

 

Now, I know absolutely nothing about this... just a wild guesstimate.

[MiCarl]

I dunno if expecting a return on investment thru rental revenue is a realistic thing ... wouldn't one use the rental revenue to cover the mortgage, taxes, and upkeep and the long-term equity would become the return on investment -OR- a minimal return would be realized on the rental combined to the that of the equity you'd realize in, say, 10 years if you sold the place.

 

Now, I know absolutely nothing about this... just a wild guesstimate.

 

I'm no expert but my understanding is that this is the best case scenario on a single family dwelling. You're doing good if the rent covers your expenses and the cost of the money.

 

Even if you're not borrowing the money for the property there is still an opportunity cost. This is the return on another investment (say a 4% CD or whatever they pay today).

[cbmel]

Your actual return on investment (ROI) is, in simple terms, how much rent money you have left annually after payment of all expenses on the property. Expenses would include interest (not principal) on any mortgage, taxes, utility and maintenance costs, insurance, etc. That net income is divided by your investment in the property (cash you paid out to acquire the property, such as down payment, closing costs, transfer fees, etc.) to give the annual rate of return on investment.

 

It gets more complicated than that when you factor in depreciation (which serves to shelter other income from taxes in the current year, but will be taxed upon sale of the property), appreciation of value (which did in fact happen in the past!), vacancy factors and other items.

 

I've got a basic spreadsheet that I've developed using MS Works that does the calculations for you. If you want it, PM me with your email and I'll get it to you.

[SilvrT]

I've got a basic spreadsheet that I've developed using MS Works that does the calculations for you. If you want it, PM me with your email and I'll get it to you.

 

Not 100% certain about this but if you have MS Excel, you may have to download a Works convertor in order to open that file. Unless of course cbmel can save it as an Excel file?

 

Frankly, I'd dump Works and use OpenOffice instead.

[cbmel]

No problem. I can convert it to Excel.

[GG54172]

Paying cash for the home guys, no mortgage. Taxes, maintenance, and real estate listing fees.

 

So I am trying to figure out how to calculate the interest for return.

 

Even if I had a mortgage, the ROI would be 55,000 invested, -5-6% for interest, but if you can get an ROI of 12%, you are still doing better than most savings accounts. A 30year mortgage on 55k is like 400 a month.

 

I did some google searches. 55,000 earning 6600 per year is the same as 55,000 earning 11.4% interest compounded monthly. However, each subsequent year the equivalent savings account interest rate will decrease, unless I reinvest the earnings somewhere. Maintenance, listing fees, taxes, and vacancies will bring the number down into the 8% range, but increase in value can offset. Nothings perfect, I know, but there are some really good deals right now.

Edited August 29, 2009 by Gregory Gill

[RedRider]

Greg,

 

I would suggest a couple of things:

 

1) Hit the library. There are many books that will outline how rental properties should be accounted for.

2) Buy a couple of hours of time from a real estate and/or a tax attorney. This will be a cheap investment to protect your $55k and future income.

 

Dealing with the taxes properly make a big difference in the ROI calculation. As of now, capital gains tax rates are lower than income tax rates (assuming you have a decent income level - if you didn't, you wouldn't likely be able to pay cash for this property). Therefore, you want a strategy that will maximize the long term capital gains and minimize the immediate income return. These items are all on paper and it doesn't mean you can't make some decent cash flow with the property.

 

Good luck.

 

RR

[RedRider]

Even if I had a mortgage, the ROI would be 55,000 invested, -5-6% for interest, but if you can get an ROI of 12%, you are still doing better than most savings accounts. A 30year mortgage on 55k is like 400 a month.

 

Greg,

 

A loan for an investment property is not the same as a mortgage. There are usually different interest rates and terms than standard occupied home mortgages. Go chat with the loan officer at your bank to find out how they treat this.

 

If may be less expensive to do this deal with OPM (other people's money). Although, not incurring additional debt has its own rewards.

 

RR

[GeorgeS]

Where can I get a house for 55,000 ???? ( with a garage of course ! )

[SilvrT]

Where can I get a house for 55,000 ???? ( with a garage of course ! )

 

ditto that!!!

 

Avg house prices around here are more like $555k. It's friggin crazy. My first house was $14.5k back in 1975. How first-time buyers can afford a house nowadays just boggles my mind.

[GG54172]

Where can I get a house for 55,000 ???? ( with a garage of course ! )

 

 

I dont think any of them have a garage though....

http://DBQMLS.fnismls.com/publink/default.aspx?GUID=444512ef-cca5-4c6d-8ef3-209a4004c4f5&Report=Yes

 

Homes in Michigan are selling for a dollar.

[Patrick46]

Where can I get a house for 55,000 ???? ( with a garage of course ! )

 

To me, the question is not where can you get a house for this much...it's how MUCH house can you get for this much???

 

Some years ago (after we bought our house), we had our old mobile home to get rid of. My buddy went nuts when we traded it to a guy for acouple of cars he had. We helped out this guy who really needed a house as he has just gotten custody of his kids...but didn't have much of an income. My buddy was on me that I could have used the mobile as a rental. My take was "the only people that are going to want to rent an old mobile home, in a dumpy park, are 'dumpy people!!!" They'd rent the place, snivel & whine about everything, and then NOT pay the rent. Then I'd have to get the sheriff to evict them from it, (after not collecting my rent for 3 months)...in which time they trash the place!!! So, I'd loose my rent money, I'd have to clean up their mess, and then pay to repair all the damages done to the place. Sounds like a total loss ta me!!! No thanks.

 

So my question to you is...for $55,000.00...can you actually get a decent enough house (in a decent enough neighborhood) that you can find folks to rent to, who actually give a crap about where they live??? If it's in a dumpy neighborhood...I'd turn my back and RUN!!!!

 

It's a buyers market out there right now. Take your time and be picky!!! Good luck to you with this. Hope it works out.

 

P.S. if it were me. I'd invest in oil. They constantly show record profits...and I'd want a piece of THAT pie....plus there's NO hassles with tenants and upkeep.

[Sailor]

Beware the renters! I used to rent out my cabin. The renters finally destroyed it. My friend bought a 4 plex as an investment. One renter nearly destroyed the whole building. He had to take out 47 bags of garbage and re do-the floors and drywall. They owed him rent for nearly a year. There was a story in the local paper recently about a woman who rented a house and collected 97 cats. It took months to get her out and the house had to be destroyed. Unfortunately these people are the ones who know all the laws and regulations. I finally got my last renter out because she had destroyed it to the point it was dangerous and had to be pulled down. Check out the laws regarding discrimination. Some people will sue you if you do not rent to them, even if they are whacked out druggies on welfare. I have a friend who used to manage rental houses. He got out of the business because he could not stand the hassles.

[GeorgeS]

As to the 55K thing, just shocked that you could get one for that, anyplace,

( except Michigan of course )

 

Ditto on the Renting:!!! Rather then Buy and Rent it, whatever you have for a downpayment on the house you are considering buying to rent, put that money down on the principle of the house you are now liveing in. Over the life of loan you will probably save more then you would ever make on Renting out any real estate.

 

I just got my Real Estate, Tax, Valuation, statement from the county last month.

 

My house Lost, $30,000 in value. And the Seattle Real Estate Market is probably one of the best in the country. Lots of stuff for sale here, but not much is selling, and the asking price's are Holding, at about 10 percent less then 2 years ago.

 

I do a lot of driveing around the general area ( motorcyling of course ) and the same signs are still there that were there over year ago !!

 

Another bad sign for the area, Mon thru Fri. the Freeways, around Seattle don't get jammed up anymore. Apparently not as many folks going to work in the morning.??????

 

But the Local gov'ts are spending TARP money, left and right on all kinds of make work projects.

 

2 weeks ago I rode down to Redding, Calif, and back thru Oregon. Took lots of back roads, Every road I was on had Road Construction going on. I could just Smell the Money being Spent !!!