Owning a Rental worth it?
Looking for a simple way to determine if a rental property will give you the rate of return you want? This modified annual property operating data may be just what you've been looking for. There are varying rates of return that rental buyers consider to determine whether a property will generate a positive rate! Sometimes the simple calculations can tell you whether you want it. Tax advantages & appreciation makes it that much better.
The 1st yield we will look at is Cash-on-Cash return. It is calculated by dividing the initial investment, usually down payment & closing costs, into the Cash Flow pretax.
To get Net Operating Income, simply taking the gross scheduled income, less vacancy allowance & all expenses- deduct the annual debt which is the principal and interest payment x 12. What's left is Cash Flow Before Tax.
i.e..... the initial investment of the down payment and closing costs, $66,000 divided into the Cash Flow Before Taxes of $5,468 to get an 8.28% Cash-on-Cash return.
The 2nd is called Equity Build-up. Each payment made on an amortizing mortgage pays a portion toward the principal balance to retire the loan. It is calculated by dividing the initial investment into the principal contribution for the year.
Continuing with the example, $66,000 is divided into the principal reduction for year one of $4,606 to get a 6.98% Equity Build-up rate of return.
It's easy to understand since you are not considering depreciation, anticipated appreciation, holding period, recapture of depreciation or long-term capital gains. Simply rent the property, pay the bills and if there is money left over, it pays a return on the initial investment.
Same goes for Equity Build-up. When you make the payment on the mortgage, the loan is reduced and while you don't have access to the money like cash flow, it is definitely your equity!!
To determine whether an ROI on a rental is good, compare it to what your initial investment is earning currently. Ten-year treasuries are earning less than 2%. Certificates of deposit are earning less than 1%.
For more information, click: Rental Income Properties & schedule an appointment with me to get to work for you!!