ROI on Rental Properties - Owned free/clear

[Zeste]

I am starting to learn the basics about ROI and investments. I am wondering if someone can help me do some figuring on some things.


Say you have a rental house, with maybe a value of around $250k. Could be a bit more if the housing market comes back a bit, but for now lets just sort of go with that.

The house has no loan on it. If you are renting it out for $1200 a month, how do you determine what your percentage of return is on that? The actual monthly income might vary a little because of property tax and maybe repairs or something, but let's just keep it simple.


so if the yearly rental income is approx. $14,400 / $250,000 = 5.76% yearly ROI?

Is this basically correct?

And if so, how does this compare with other investments? I know there's been talk on here about the hassle of having rental property, but I am going to inherit probably 2 paid-for properties that are rentals, and I am wondering if I should think about selling the homes, or if that's a pretty good return, especially considering the idea that the houses might go up in value in a few years beyond what they are now.

[Lyrical]

I'd be interested in knowing this also. I'd like to diversify my income outside of my business. My realtor says he has 71 rental properties, and that he'd be making money on them if he didn't owe debt on them. I am probably in a position to pay cash for a rental property, and am trying to learn more about it.

Does anyone have any good sites or books on being a landlord of multi-unit properties?

[Aetos]

I don't think that is how roi is calculated. Since your investment is essentially nothing, it should be based on how you value your time, not the value of the rental property

[Zeste]

Well, right now I am looking at it as "I could sell this place and have $250,000 dollars in a savings account, or have $1050 income a month and retain the asset, but no large sum of cash on hand."


Plus, at this moment I don't have anything I'd do with the money, and if I did, is it going to return a steady 5-6%? Property is pretty stable comapred to say, investing in something riskier, or selling a home to invest in a business that could easily bust and wipe out the cash.

[prescient63]

That isn't how I would do my analysis on the a rental property. First it isn't going to be rented all of the time (repairs, tenants pay late, and all that other jazz) , and as far as I know most multi-unit property owners expect a 70% occupancy rate (someone correct me if I'm wrong). You'll also have some appreciation in the house, probably at some point, but depending on your geography that could take a while.

I think it would be more accurate to say that the property is yielding (14.4 *0.7)/250 a year. All in all you should take that 250k and evaluate the housing yield against the different investments that you could potentially be making.

I don't think that is how roi is calculated. Since your investment is essentially nothing, it should be based on how you value your time, not the value of the rental property

I disagree because you are facing an opportunity cost, you could always sell the property and invest in something else.

edit: cost not loss

[Aetos]

Originally Posted by prescient63

I disagree because you are facing an opportunity loss, you could always sell the property and invest in something else.

So isn't that the oppurtunity cost of owning the property vs selling it and doing something else with the money? I don't own any property so I am not sure, but thats how I have always looked at it. When I calculate return on investment on something I was given for free, I look at the amount of time I put into it and count that as my investment in the property, and do an ROI on that.

[The Ancient]

First thing you have to do though if you wanna get serious is get some more concrete numbers. What you think it's worth and what you think you can rent it for yearly have a pretty big effect on your result. You have to keep in mind as well that ownership has costs that will reduce your rent income. Then you have to think about tax benefits and costs as well...

So yeah.

[prescient63]

Originally Posted by Aetos

So isn't that the oppurtunity cost of owning the property vs selling it and doing something else with the money? I don't own any property so I am not sure, but thats how I have always looked at it. When I calculate return on investment on something I was given for free, I look at the amount of time I put into it and count that as my investment in the property, and do an ROI on that.

I'm not even sure what your question is but....

He has 3 options essentially:

1: Sit on a property he may or may not be using and hope it appreciates while paying for taxes and upkeep.

2: Rent out the property while paying for taxes and upkeep while hoping it appreciates.

3: Sell it and invest in something else.

I think we can assume that 1 is a terrible option in the context of investing. So hes left with option 2 or selling the property and putting that money to work for him. Essentially has has $250k and varied investment opportunities so his goal should be to pick the investment opportunity that provides him with the best risk adjusted return while taking his risk tolerance into account.

[prescient63]

Originally Posted by The Ancient

ROI is just the completely wrong term for what he's looking for. He just wants to compare two income streams; I'm too lazy to figure out the term for it, but that's what it is.

You could say he wants to evaluate the NPV of two investment opportunities.

[The Ancient]

There you go, that's what I was looking for, been out of school too long.

[Candiarie]

Originally Posted by Lyrical

Does anyone have any good sites or books on being a landlord of multi-unit properties?

Bears repeating. I've grown up with landlords' kids so I have a lot of experience but I'm interested in seeing if there's more that I missed.

[Eomer]

Originally Posted by Aetos

I don't think that is how roi is calculated. Since your investment is essentially nothing, it should be based on how you value your time, not the value of the rental property

What? The value of the investment is the worth of the property. He could sell the house and invest that money in either fixed income or equities instead, without having to lift a finger. So in other words, you'd want to see a higher ROI from rental properties than you'd expect passively investing it while of course factoring in risk. Renting property you don't owe money on is pretty darn low risk. Even if you lose a tenant, the underlying value of the property isn't going to decline, unlike what can happen with stocks. Although of course the housing market correction in some parts of the US I am sure has nailed a lot of property owners.

5.7% sounds kinda crappy, although obviously you have to take in to account expected gains in the property value as well, vs costs of maintaining the property.

My dad owns a fair amount of commercial square footage, and he's mentioned in the past that he's typically seen a 10-12% ROI over the years, but I'm not clear if that's simply leasing income, or if that also includes appreciation. I have no involvement in any of it, so my knowledge is pretty lacking, I just know that he's been burned by a couple financial advisors and now refuses to invest any money in the stock market, and instead buys commercial property.

[Zeste]

I am sure there's some differences in landlording or owning complex, as opposed to regular residential homes.

Both of the houses were someone elses spec house that my dad foreclosed on before he died. Property managers run all the day to day rental stuff.

[Aetos]

Originally Posted by Eomer

What? The value of the investment is the worth of the property. He could sell the house and invest that money in either fixed income or equities instead, without having to lift a finger. So in other words, you'd want to see a higher ROI from rental properties than you'd expect passively investing it while of course factoring in risk. Renting property you don't owe money on is pretty darn low risk. Even if you lose a tenant, the underlying value of the property isn't going to decline, unlike what can happen with stocks. Although of course the housing market correction in some parts of the US I am sure has nailed a lot of property owners.

5.7% sounds kinda crappy, although obviously you have to take in to account expected gains in the property value as well, vs costs of maintaining the property.

My dad owns a fair amount of commercial square footage, and he's mentioned in the past that he's typically seen a 10-12% ROI over the years, but I'm not clear if that's simply leasing income, or if that also includes appreciation. I have no involvement in any of it, so my knowledge is pretty lacking, I just know that he's been burned by a couple financial advisors and now refuses to invest any money in the stock market, and instead buys commercial property.

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

[Lyrical]

Originally Posted by Aetos

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

There is an opportunity cost to every choice in life. If his highest opportunity is that he can sell it for 250K, that is his opportunity cost.