Example for Numbers: You have a relatively bad experience but not unrealistic experience with your rental.
- You have a 11.6% (7 months out of 5 years) because in year 3 you had a tenant that did some damage, it took you 4 months to evict, repair, and re-rent the unit. (It also happened while you had your second child to add drama and family stress).
- The tenant trashed the carpet and did some drywall damage, you repair it yourself and have carpet installed – $1800 repair.
- During the 5 years you spend $5000 as planned for disasters because the furnace goes out and the roof needed some repair.
- You decide you want out of the game and sell the rental 5 years with a real estate broker. There has been no appreciation or depreciation on the property.
- Rent goes up $10 a year net over taxes increase
- We will assume you sold the day after the rental in year 5 left. (Not likely, but favorably in the calculations)
What’s coming in:
- Year one Revenue: 950 * 11 months = $10450
- Year two Revenue: 960 * 11 months = $10560
- Year three Revenue: 970 * 8 months = $7760
- Year four Revenue: 980 * 12 months = $11760
- Year five Revenue 990 * 11 months = $10890
- Deprecation Net @ 25% , $454 * 5 = $2270
- Equity in Sale: $4780Total in: $58470
What’s going out:
- Year one Revenue: 725 * 12 months = 8700
- Year two Revenue: 725 * 12 months = 8700
- Year three Revenue: 725 * 12 months = 8700
- Year four Revenue: 725 * 12 months = 8700
- Year five Revenue 725 * 12 months = 8700
- Carpet and Drywall Repair: $1800 once
- Cost of Broker: $4200
- Taxes on Gain (($9090 ($1818* 5) + $4780 equity built up) * .15 – $4200 broker’s fees ) = $1450.50
- Opportunity Costs of $13000 @ 5% for 5 years = $3591Total out: $54541.50
Net: $3928.5 over 5 years, $758.70 a year, $65.47 a month.
This is assuming:
You don’t have a substantial increase in tax
Additional legal costs
Any Insurance claims/deductibles
You don’t go over $1000 a year on average for disasters
Rent can go up $10 a year OVER the increase in tax
The rate of return would only be 5% on your down payment
You rent the property without paying someone to help you rent the property
$65.47 a month after all of those assumptions. How many hours do you think you average dealing with the tenants and repairing – What do you think the $ per hour is? Whatever it is, I bet it is scary.
Some of you, especially rental owners are up in arms right now. Saying things like:
”I don’t have 89.4% occupancy, I have 95%”
”My tenants never trash my properties”
”I plan on owning it more than 5 years and that’s when the money really starts to happen”
”The real estate market will appreciate”
”I would never pay that much for a house”
“I could rent it for more”
”I only own multi-units”
”There are more aspects of closing costs that benefit you tax wise” (I admit I ignored closing costs besides the broker/realtor’s on the selling end)
All of these are valid arguments, but *really* put a pencil to your properties – it might scare you. For me, even if the it was 500% more than my estimation in the first five years – $19642.50 – it’s not even close to being worth it to me. But that is my opinion.
Also I would like to note that the repairs and disasters fund might be a little favorable towards owning rentals. I think an argument that my example was off one way or the other can be made, but this article is more about the big picture.
Note: I completely understand the longer you have a property the more lucrative it becomes.
Disagree with me? Leave a comment.
Still think it is easy Being a Landlord?