【A Simple Calculation of Returns on U.S. Rental Real Estate Investment!】

【A Simple Calculation of Returns on U.S. Rental Real Estate Investment!】CLEC Club

Writing date: Jan 16, 2019

This is usually how I calculate returns on rental property. (You can adjust the numbers based on your actual situation.) Most investment properties have returns of 5%-7%, lower than investing in SPY QQQ VYM. And you do not have to worry about bad tenants!

The example below uses a property's current value of $2.10 million:

Loan: $850,000

Loan interest rate: 4.5%

Property tax: $25,000

Monthly rent: $4,000

Cash-flow income:

Rental income: I assume your rental income is $4000 per month, or $4000 X 12 = $48000 per year

Cash-flow expenses:

Property tax $25000

Interest expense:

$85 X 4.5% = $38250

Net cash flow:

$48000 -$25000-$38250= -$15250

So your cash-flow return is negative:

-1.22% =（-$15250/$1250000【210-85】）

Real estate appreciation varies by area. I assume 5.5% property appreciation.

Then the annual return is （210 X 5.5%)/(210-85) =9.24%

So the return is 9.24%-1.22% =8.02%

With this kind of trial calculation, you should sell the rental property and invest instead in SPY QQQ or the high-dividend index fund VYM that we mentioned.

PS:

This does not yet consider income tax on rental income.

As the loan is gradually paid down, equity will increase and the interest portion will decrease. Returns will decline as the loan amount falls.