Total ROI Calculation Help please

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Total ROI Calculation Help please

Bob Gillar
Ardmore, PA · Member since 2017 · 6 posts · 0 votes

Prior to buying my first beach vacation (out of state) rental property, I wanted to use numbers and calculations to asssss my potential investment.  

I'm making an excel sheet with all the calculations found on this website (I will link at the bottom) such as ROI, Cash flow, etc.

I'm hoping someone can please help me with the data needed for TOTAL ROI. The article mentions taxes gained and lost - is this the place to factor in taxes paid on the income from the property (is that taxed at a rate of ordinary income?) - and is this where a deduction of mortgage rate interest is calculated or is that not necessarily a factor?

When factoring in the Equity Accrued; is this basically the equivalent of whatever portion was paid down from the principal of the loan?  Is theoretical appreciation of the propery used in this equation?   

As it's possible the article couldn't include every single item, are there any other items which a first time buyer should include in a TOTAL a calculation prior to the purchase?

Thank you! 

Link: https://www.biggerpockets.com/renewsblog/2010/06/3...

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Christopher Phillips
Real Estate Agent · Garden City, NY · Member since 2016 · 3k+ posts · 1k+ votes
9y

@Bob Gillar

You're kinda over-analyzing things if you get into Total ROI due the complications of dealing with personal tax returns.

Most investments for 1-4 family properties should focus on annual Cash on Cash return and CoC ROI. If you start getting into Total ROI, it will take forever to analyze properties.

Here's the thing. When you have rental property, you will have the ability to itemize the expenses for the upkeep, utilities you pay, general maintenance, property mgmt fees, mortgage interests, and other misc. expenses.

On top of that, you also get to use depreciation over 27.5 years. So, depending on the scenario, you usually don't pay taxes on the passive income as long as you have enough expenses and depreciation to itemize. Then you only have to worry about taxes when you sell it or when you no longer have depreciation.

Since everyone assumes the ability to show a net loss on rental properties, it's not really worth digging into Total ROI to determine if a property deal is good or not.

Vacation rentals are still fine as long as you only personally use it no more than 14 days of the year. If you stay in there longer than that, you'll be able to deduct expenses associated with the rental income, but you can't show a net loss on your tax filings anymore. You're just trying to earn a little income to offset your vacation spot.

On your other topic, yes, Equity Accrued is the equivalent of paying down your mortgage every year.

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  • Christopher Phillips
    Real Estate Agent · Garden City, NY · Member since 2016 · 3k+ posts · 1k+ votes
    9y

    @Bob Gillar

    You're kinda over-analyzing things if you get into Total ROI due the complications of dealing with personal tax returns.

    Most investments for 1-4 family properties should focus on annual Cash on Cash return and CoC ROI. If you start getting into Total ROI, it will take forever to analyze properties.

    Here's the thing. When you have rental property, you will have the ability to itemize the expenses for the upkeep, utilities you pay, general maintenance, property mgmt fees, mortgage interests, and other misc. expenses.

    On top of that, you also get to use depreciation over 27.5 years. So, depending on the scenario, you usually don't pay taxes on the passive income as long as you have enough expenses and depreciation to itemize. Then you only have to worry about taxes when you sell it or when you no longer have depreciation.

    Since everyone assumes the ability to show a net loss on rental properties, it's not really worth digging into Total ROI to determine if a property deal is good or not.

    Vacation rentals are still fine as long as you only personally use it no more than 14 days of the year. If you stay in there longer than that, you'll be able to deduct expenses associated with the rental income, but you can't show a net loss on your tax filings anymore. You're just trying to earn a little income to offset your vacation spot.

    On your other topic, yes, Equity Accrued is the equivalent of paying down your mortgage every year.

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  • Daria B.
    Rental Property Investor · Gainesville, FL · Member since 2015 · 1k+ posts · 432 votes
    9y

    @Bob Gillar have you tried to contact the author @J Scott. He can best answer your question since it's his spreadsheet.

    It appears though that if you are talking about taxes related to selling, this spreadsheet is likely not the one that would determine any kind of gain/loss.

    This spreadsheet is in the file area of BP and I use it with a number of other spreadsheets that suit my needs. This is a good spreadsheet and assumes steady payments throughout each year but I pay down my mortgages so I altered it to include the pay down of one of my properties. 

    Good Luck...

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    9y

    Christopher's response above is perfect. There is no right or wrong on what to include in Total ROI -- while in theory it's everything that contributes to cash flow and equity, in reality, you'll never be able to calculate all those factors -- at least not until after you sell the property.

    Focus on cash-on-cash return, and if you really care about Total ROI, you can add in equity accrual. I'm not a fan of adding in tax deductions, as they are only going to give data relative to your current tax situation -- which can change at any time. It gives you more information about YOU than about the investment.

    As for adding in depreciation, that gets recaptured at sale, so it's not as big a benefit as you might think.  And appreciation only matters when you sell -- and it can change a lot between now and then -- so I don't like to add that in either.

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