2million - My Journey to Financial Freedom

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Wednesday, April 05, 2006

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:

Description

12/31/2004

12/31/2005

Change

Equity in Rental

$38,586.00

$ 40,842.00

$2,256.00



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:

Description

Income/(Exp)

Rental Equity Gain

$ 2,256.00

Rental Income

$ 6,000.00

Mortgage/Escrow Payments

$ (4,879.15)

Maintenance

$ (814.89)

Total

$ 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.

 

12/31/2004

Return

RoR

Rental Property

$ 38,586.00

$ 2,562.04

6.64%



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.

8 Comments:

  • 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+

    By Blogger pyroracing85, at 4:44 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.

    By Blogger 2million, at 4:49 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..

    By Blogger pyroracing85, at 5:07 PM  

  • The mortgage interest can be deduct as a rental expense.

    By Blogger 2million, at 5:14 PM  

  • $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

    By Blogger makingourway, at 7:36 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.

    By Blogger 2million, at 8:48 AM  

  • By Anonymous Anonymous, at 4:01 PM  

  • The last piece of my net worth is my real estate asset. This real estate asset was my primary residence that I converted to your home or home during the early part of 2005 after a major bathroom remodel.

    Memphis investment property

    By OpenID stevena303, at 11:53 PM  

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