Turning my house into a rental. How do i calc cost for ROI?

Question

I'm very new to learning about real estate, and have some questions. I'll have more after this but my other questions could change based on the answers i get. I'll admit, they may be stupid, it scares me enough that i want a very detailed introduction book that tells me everything to do. I know that it won't happen and would be impossible as we are all different.

Anyway, I bought my house 6 years ago and got a really good deal. Now, having learned about real estate, I really want to put it up for rent. I have probably put $12,000 into it since living here. How would you this calculate the return on investment when the time comes to rent it out? Would you use what i spent over the years in mortgage payments? Would you add cost to repairs that I've done? Or would you simply say that on the day i move out and make it a rental property, then all repairs/costs get counted in my calculations?

Jonathan Barr · Answer

You would calculate it based on your payment, repairs and improvements you have out into the property.   Your mortgage is paying down your principal and interest you can write off for taxes.

It also good to look at how much equity you have in the property.   Its good calculate your return based on the equity in your property.   If that's less 5 or 6% I would sell and 1031 into a larger asset.  Always consult your CPA regarding any of these actions.

Jared Pinkus · Answer

@Maureen Santibañez Equity = Property Value - Property Debt

Bob Norton · Answer

@Bryce McBride Calculating the ROI on a personal residence can be complicated.  Most people don't think about, or take into consideration, the value you received from the property for living there (and not paying rent otherwise).

So, I would simply sum up the amount of your original down payment and any improvements made to arrive at your investment (ignoring your mortgage payments, as these would have been rental payments otherwise).  Then, you would calculate your cashflow from a prospective tenant by taking the annual rents and subtracting the annual cash outflows (mortgage, insurance, property taxes, expected maintenance and vacancy).  Now you can calculate your ROI by dividing your annual cashflow by your original investment.  This would give you a quick number comparable to any new investment.

If you use the market value of your property as your investment, then you will be calculating your yield instead of ROI.  Yield does not take into consideration that the appreciation and equity in your home is not a cash investment, only what type of return you could expect if you paid market value for a similar home with similar cash flows.  This figure is useful for comparing two new investments, but not an existing property and a new investment.  For that, you should be comparing net cash flow.

You can always refinance an existing property to pull out the equity to use in another investment.  By pulling out your equity, you goose your future ROI in the existing rental property.

Tim Siocheng · Answer

I would check if you can refinance the loan, that way you can still qualify for primary home rates vs investment rate. It's about 1% difference. (especially now rates are really low, time to take advantage) For all you know you can pull some money out.. but check also how much are the rents going around in your area.

I would make sure that the financials (cash flow) are there. So for example your in your area the average rent rate is $1000. And your mortgage (before you refinanced) $600.. you have room to play with in terms of other cost. Such as property management, repairs, taxes, etc..

Look for property management company. I prefer doing this because it alleviates you from the day to day landlord tasks especially being new in the real estate game. They also screen your tenants, collect rents and they know the market more and the details to make sure that the property meets the requirements to get rented out.

Maureen Santibañez · Answer

@Jonathan Barr

How do you find out how much equity is in a property?

Turning my house into a rental. How do i calc cost for ROI?

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