ROI on Rental Properties - Owned free/clear

[Eomer]

Originally Posted by Aetos

I was presuming that he inherited it and thus the cost to him was nothing.

That is irrelevant in evaluating whether his ROI from renting is worthwhile as compared to selling and investing elsewhere.

[lendarios]

I'm not a business person but here what my common sense tells me.

A Return On Invest is the amount you are going to gain back in savings/income faster a certain amount of money has been spend and a certain amount of time.

Lets assume a house/apartment cost the owner $12000 a year for 30 years and 1k a year afterward.
If you can get rental income of it of 70% of that amount on yearly basis you you have a net amount of neg $3600 yearly out of pocket on that property.
You are losing money on it.
So you lose $3600 a year for 30 years = $108000
Now the property after the 30 year still generates income. so its going to take a good 108000/8400 = 12 years of getting that money back.
So after those 42 years, then the house will generate a positive effect on your overall income.

The key to reducing that number to a more feasible amount is to pay your mortgage as fast as possible.
If you let your mortgage run its course all the 30 years you will most like pay double the amount of the original loan.

Now returning to your example where the house is paid for and it cost you 250k.
250000/14,400 = 17, its going to take 17 years to make back your original investment.
After 17 years you will be able to have a positive return on your income.
Now a house' price is not lost, you can regain some of the original investment by selling, however trying to factor this in on the formula is hard because you can nto determine the sale price with precision at the time of the purchase. It could range from devaluation to increasing in value.
Something we learned recently is that the dogma of "houses prices will always go up really does not applies". At best i would say try to factor in that you can sell and return your original money back, in your case your 250k.

If that is the case then the overall math is (Sale price + Amount goten from rent) / (investment capital + ongoing expenses)

So if you rented the property for 5 years and sold it at the end for 250 your Roi is
250k+(5*14k)/250k+(5*yearly taxes), now while that number seems like a huge proportion is highly dependent of you being able to sell the property at the end at the same or higher price that what you got.

[Aetos]

Originally Posted by Eomer

That is irrelevant in evaluating whether his ROI from renting is worthwhile as compared to selling and investing elsewhere.

I see what you are saying, but how do you account for it when you get it for free. So how would I calculate my ROI on my grandmothers house which has a mkt value of $1mil and initial cost of $3,500?

Obviously the ROI is going to be stupid high as I can rent it out for $2500/mo.

[lendarios]

Now if the house was at no cost to you then i don't think a ROI applies , since there is no investment, just income generated that did not require an original investment.
In that case the rental house is not an investment, its the same as winning the lottery with a ticket a friend bought for you.
Now if you really want to get technical, then i would say just divide the expected total rental income from the property taxes/maintenance cost you will incur as the owner.

[prescient63]

Originally Posted by Aetos

I see what you are saying, but how do you account for it when you get it for free. So how would I calculate my ROI on my grandmothers house which has a mkt value of $1mil and initial cost of $3,500?

Obviously the ROI is going to be stupid high as I can rent it out for $2500/mo.

You calculate it the same way you would if you had bought it for 1million. It's 1 million that is invested and you want to know your return on it.

[lendarios]

Originally Posted by Aetos

I see what you are saying, but how do you account for it when you get it for free. So how would I calculate my ROI on my grandmothers house which has a mkt value of $1mil and initial cost of $3,500?

Obviously the ROI is going to be stupid high as I can rent it out for $2500/mo.

The question is if you were to sale that house for 1 mill, can you now take that money and generate more than $2500 a month.
So you will have to find an risk free, or low risk investment, that will generate more than that amount.

What it comes down to is the risk involved in the other form of investment. And how is that risk management factored into.

[lendarios]

Originally Posted by prescient63

You calculate it the same way you would if you had bought it for 1million. It's 1 million that is invested and you want to know your return on it.

How come? There is no initial investment, no risk factor, you are not affected by volatility on the market.

[Lyrical]

Originally Posted by lendarios

How come? There is no initial investment, no risk factor, you are not affected by volatility on the market.

Because that is his opportunity cost. You learn this in your first five minutes of a base level Economics course in High School.

[Eomer]

No shit. This isn't a difficult concept. The fact he inherited the house is irrelevant.

[Aetos]

Originally Posted by Lyrical

Because that is his opportunity cost. You learn this in your first five minutes of a base level Economics course in High School.

So you can use ROI and opportunity cost interchangeably? I have invested nothing in the house, so my cost basis is nothing. I understand what the difference is in these two terms, what I am getting at is that ROI is not what you should use for inherited properties, but rather opportunity cost

[Lyrical]

Originally Posted by Aetos

So you can use ROI and opportunity cost interchangeably? I have invested nothing in the house, so my cost basis is nothing. I understand what the difference is in these two terms, what I am getting at is that ROI is not what you should use for inherited properties, but rather opportunity cost

You guys keep asking the same question over and over again. The answer doesn't change. Your cost basis is what you can sell it for. Regardless of whether or not it cost you $0, there is a cost to the house because you can sell it for 250K. So the I(nvestment) part of ROI becomes 250K.

[Grooverider]

If the net rental return is lower than the net income from the invested capital value of the property then sell the property.

Where's the confusion?

[Zeste]

Originally Posted by Eomer

No shit. This isn't a difficult concept. The fact he inherited the house is irrelevant.

One thing to that is probably gonna be important in a few years, if house prices firm up, is this:

My dad loaned money to build the houses, it was NOT the total cost of the home, or the value.

When I say 250k, that is all my dad loaned, so that's all I look at it as. He was the primary note holder, and no secondaries, so when the dudes bankrupted and foreclosed, we just got the homes which we had loaned 250 to the builders.

250 is not an appraised value, it was just a portion of the building costs. They could be worth more right now today, or maybe quite a bit more in the future.

But right now, the only real numbers I have is what my dad had into these places, and how much we are renting them for right now. For all I know, the houses are worth more like 300k.

[Evelys]

While y'all are talking a bit over my head, you might also want to remember that you're likely to incur a capital gains tax on the sale of the house as well.

[Tyreny]

Regardless of how you want to calculate your rate of return, which is what you are talking about with ROI, the fact remains that you have ownership of a valuable asset. Since you personally did not pay anything for the asset and are now receiving payments from it, my advice is leave it alone and let the "free" money roll in.

The only reason to worry about an ROI is if you are thinking about liquidating and reinvesting in something with a higher rate of return. In which case, the value that you can receive from the sale of the home would be the appropriate value to base decisions upon. Simple math tells you that as the price of the home rises you will either 1) see a decrease in your rate of return (more favorable to sell and purchase another asset with a higher rate) or 2) need to raise the rent in order to maintain the same rate of return which may decrease your occupancy rate depending on the market.

The fact that you did not pay for the asset doesn't make the value of it zero, it just makes your own personal return have a 0 denominator. It's confusing because most (all?) investment theory is based around having to pay for the rights to valuable assets. It assumes that valuable assets are in fact of value and people just don't go around giving them away for free.

Milk it.