Taking Assessment of My Portfolio Returns, Part 6: Investment Property

In the 1st part of this series I determined that the total return for my net worth was a measly $2,094. In the 2nd and 3rd parts, I found my retirement and cash accounts had respectable returns of $8,331 and $778 respectively, for the year. In the 4th and 5th parts, I found my stock and company ownership investment accounts had an embarrassing returns of -$685 and -$8,892.

The last piece of my net worth is my rental property. This property was my primary residence that I converted to a rental property during the early part of 2005 after a major bathroom remodel.

You may not agree with my methodology, but I had to make a couple assumptions to calculate my return:
-all equity gained from principal paydown over the course of 2005 will count as part of my investment gain
-I am ignoring the bathroom remodel expenses as I treated those as expenses in 2005 that reduce my savings rate so if I counted them here I would be double counting those expenses
-I am only counting mortgage/escrow payments for the last 5 months of the year (basically the months the house was rented) as expenses

Lets take a look at the equity change in my property:





Equity in Rental


$ 40,842.00


I had a net change of $2,256 in equity for my rental property. This was calculated by finding the difference of the value of the property (I used the original purchase price) and the remaining mortgage balance.

For 2005 I had rental income of $6,000. My monthly mortgage/escrow payment is $975.83. I also had $814.85 in maintenance and other expenses for the property.

Here are the results:



Rental Equity Gain

$ 2,256.00

Rental Income

$ 6,000.00

Mortgage/Escrow Payments

$ (4,879.15)


$ (814.89)


$ 2,562.04

Not bad. By these calculations I came out ahead by $2,562 on this rental property. This should improve in 2006 as the property should be rented for the full year.

I'll go ahead and calculate a Rate of Return although this calculation ignores alot of the costs and advantages that come with this property. I am calculating a rate of return based on my calculated equity in the property, but this ignores things such as closing costs, bathroom remodel costs, and other expenses like appliances I bought. It also doesn't factor in any of the tax advantages of rental property (which are another discussion) nor any amount the property may have appreciated.





Rental Property

$ 38,586.00

$ 2,562.04


So while I don't really place much weight on this calculation, I think it gives me a rough idea of the rate of return for this investment. Given the added benefits of appreciation and tax losses, I believe this investment property will do well in 2006 and beyond.

In the final installment to this series, I will recap my review and try to figure out what I need to focus on in 2006 to improve my overall return.

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Comments (8)

DATE: 4:44 PM
Wow and just think some people would be lucky to break even..by the way where you find a 975 dollar mortgage!!! I went to apply for a house down here in tampa and they mortgages are all at least 1300+

DATE: 4:49 PM
Thats the beauty of a 30yr fixed at 5.6%. I refinanced with a no closing cost mortgage at just about the low point a few years ago.

DATE: 5:07 PM
That is awesome... I doubt 5.6 exists anymore you timed it right!Now are you able to deduct the interest on this house or you can't do that anymore since it isn't your primary..

DATE: 5:14 PM
The mortgage interest can be deduct as a rental expense.

DATE: 7:36 AM
$2M,Nice recap and congratulations on being cash flow positive with the property!!A few thoughts, have you included advertising or broker commissions related to obtaining tennants in your expenses?How will you gain next year's tenants?It would be nice if you did an income projection of the property for next year, perhaps factoring in anticipated expenses, vacancy, etc.... Then you could compare how it went next year or mid-year.Good job on the mortgage, too. The best I was able to find recently was 6% for a 30 year and now it's challenging to find 6.25%!Keep posting -- love the site.Have a wonderful Thursday,makingourway

DATE: 8:48 AM
I managed everything myself - advertising ended up costing me nothing but a few hours of time. I handled showing the property to prospective tenants, etc.Also I just got a renewal lease signed a few days ago so as long nothing unexpected happens I should have 100% occupancy this year.I'll see if I can throw the numbers together and run a 2006 proejction.

Are you still claiming the Homestead Exemption on the rental property? If you are, it is technically not legal, if you aren't - the tax difference will drop the 7% return by at least 1-2% (easily). Have you thought about raising your rents?
I tried the rental thing before -tried going totally legit without the Homestead Exemption (the honest approach) the local governmental taxes absolutely killed me. I was paying 2-3 times the taxes an owner occupant would pay. I sold, took my loss and got out - just to stop the bloodletting.
This is a VERY disgusting fact of life for a real estate investor in NE Indiana - and it should be against the law. Gouging the investor makes no sense at all...especially after I repaired the house including making expensive cosmetic changes. All in all, it absolutely wasn't worth my time...at least not from a financial position. I learned a lot of life lessons through the whole endeavor though.

No, its a legit rental property - I am not famaliar with the tax law in Indiana, but I can't see how it significantly hurts your rate of return in NC. The local taxes are the same, you still get to deduct your mortgage interest and other expenses, plus you get to depreciate the structure. Works out to be a tax advantage for me.

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A personal finance weblog of my journey to reach my goal of $2 million + the value of my primary residence.
Current Net Worth: $1,938,393


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