2012 Passive Income: Rental Property

Its been several years since I did a thorough analysis of our rental property performance and investment return. Here is an analysis of our 3 rental properties for 2012 that should give a pretty reasonable view of how these investments are performing. All three rentals are single family homes that we have acquired over the past 12 years.


**Property Taxes, Insurance, Repairs & Maintenance, Advertising, etc
*Potential Free Cash Flow assuming 2012 Rent, 2012 other expenses, and minimum mortgage payments. This is the best indicator to me of the potential income we would receive from these investments when we are financially free.

Summary
These days I prefer to look at these rental investments together. After all, I tend to eliminate the highest interest rate loans first and as a result have eliminated debts on certain properties, etc which skews the results. If you combine them together I think you get a more reasonable view of our return.

I can't complain about a near 7% return that ignores asset valuation changes. The main downside of these investments is they also consume some of my time and energy and that isn't factored into these returns. Back in 2006 when I started this I tried to do everything myself to keep the explicit expenses as low as possible. Today, being so time poor, I only attempted to do 1 repair and handled re-renting 1 house myself this year. The rest of the work I outsourced to contractors and other folks to minimize the amount of my time required. When we are financially free I suspect I will move back to doing much of the work myself to boost our net income.

Related in Rental Property:

Why Invest in Rental Property (Mar 13, 2012) The real estate investing infomercials of the housing boom suggest that real estate could make you rich - the benefit of real estate being exponential returns of your investment. While I only have a few small real estate investments there...

Rental Property Investment Breakdown (Sep 27, 2011) Here is some overdue financial record keeping from our latest rental investment in August 2011. This breaks down all our out of pocket costs to purchase the property and get the 1st tenant in place. Out of Pocket Investment in...

Thoughts On Buying Another Property In This Environment (Aug 15, 2011) We recently put a contract on a property to serve as an expansion to our rental properties. We weren't looking to expand, but an opportunity popped up that was compelling enough for us to make an offer. As we have...

Comments (7)


because of leverage your return is actually much better. you might want to also do the analysis with your actual outlay instead of cash + debt.

I agree with br. The way you are calculating it generates Return on Equity. The way I calculate ROI is to only count my capital investments as my investment basis. If you didn't keep track of those expenses throughout the years, it may be difficult to extract your true ROI, but it should be higher than what you up there now. Congrats on the great numbers!

Sorry. Where do you include the monthly mortgage payments? Is it already part of FCF? Thanks.

I'm curious about the amount of time and energy you spend on managing and maintaining your properties. Your complaint is fairly typical amongst real estate investors, from what I've experienced. My financial advisor is actually about to sell an investment property he bought and self manages because he doesn't want to deal with it anymore.

The above comments are correct. For my rental properties, for example, I "put in" approximately $30k on each upfront when you factor down payment + closing costs + repair costs. After that, the mortgage payments are simply an expense counted against income, and the equity in the house is ignored. I make nearly $5k in cash flow profit each year for each house - so $5k/$30k = about a 16% return. I don't factor in depreciation, taxes, or equity gained in my rough calculation, because the return falls under the category of "good enough." If I did factor in equity, the return goes up to about 20%, and if I get decent appreciation it could easily go much higher.

2mil's return on equity calculation is probably helpful to decide if they should keep the rentals or sell and invest the equity elsewhere.

What about depreciation of the houses? You bought them 12 years ago and not new - do you put any money aside for any redecoration or major maintenance.

Presumably the land is relatively cheap so all the house value in its materials.

When I ran calculation for a couple of properties it represents a significant contribution, lowering value of return.

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A personal finance weblog of my journey to reach my goal of $2 million + the value of my primary residence.
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