What’s coming in:
- Rent: $950 * 12 months * 91.7% occupancy rate = $10453.80 rent collected.
- Deduction: $1818 * .25 tax rate = $454.50 net for a year.
- Equity (Year 1-5 average): $956 a year.
Total: $11864.30
What’s Going out:
- Total Cost: $725.24 * 12 months = $8702.88
Total: $8702.88
Difference: $3161.42 a year. Or is it?
Assumptions made:
- This calculation assumed you can have it rented 11 months out of the year for the first 5 years.
- This calculation did not include any additional money for major rehab
- This calculation assumed only $1000 a year for disasters which can easily be more (or less even though it is less likely, remember it could be $0 for 4 years and $5000 for 1 year to average $1000 a year.)
Other Costs:
- Let say you decide to sell the property at the end of year 5 and the equity earned is accurate above. You earned $4780 of equity. Assuming there is no appreciation or depreciation in the housing market – you go to sell your rental for the original $65,000 + $4780 = $69,780, roughly 70k. You find a buyer for $70k.
Lets forget the fact that the whole trying to sell while renting thing is certainly going to cause hardship. Ready for gain? Bad news, most likely you had to pay a broker or realtor 6% – roughly $4200. Ouch. That’s virtually an entire wash of your equity for the first five years. So that $3161.42 a year now looks like $2321.42 a year. - You put 20% down, $13000. Assuming you got even a conservative 5% return your opportunity cost on that money is $650 year one and $3591 in the first 5 years.
- Need a lawyer? You might. A lot can happen in the real estate world and tenants have rights. That’s going to cost you.
- Need to evict someone? Might be months before they are thrown out – that calculation above is going down $950 a month, every month until they are out and you have it rented again. I wish I could add a dollar amount to the stress as well.
- You got someone evicted and found that your rental is trash? Its pretty easy to do several thousand dollars worth of damage fairly quickly. Now you have –3 months of rent while trying to evict and you have thousands of dollars in damage and it might take you a month or two to get it back to renting condition. That’s thousands of dollars of damage and five months (950*5) or $4750 of no rent. Lets say someone gets you badly and really trashes your place. It could take you years just to break even for one bad year.
- There is a saying why people dislike rentals. “Toilets and Tenants.” Something breaks, you are getting a call. Place is on fire, you are getting a call. Tenant doesn’t pay? You have to get in contact with them. Time, repairs, toilets, problems, or disasters. There is absolutely no way to say how much time especially because a tenant’s personality and expectations can change this a lot. Expect stress.