Rental Income Comparison
October 18, 2006
Obviously there are different philosophies to generating rental income. Today, 2million blog posted an analysis of the yearly income for his rental property. His ROI is around 7%, not exactly stellar. One reason for this is that his property is not highly leveraged. Many financial advisers recommend amortizing rental properties as far into the future as possible. The reason being that any money spent on interest for rental properties is tax deductible.
The key difference between 2mil’s results and my own are that I rent to students, so I can cram 5 people into a house that would normally only have 2-3 bedrooms. Thus, my monthly rents for the house are in the $2000 range and my expenses only increase slightly due to increased utility costs. This is a major advantage to my area’s demographics (mentioned earlier).
Overall, my ROI is in the 30% range including the $$’s that flow back into the home’s equity.
I’ve recently been investigating the difference it makes to re-amortize my rental mortgages out to 25-years (they are currently slightly accelerated due to a calculation error at the bank). My payments would reduce by $60/month. If I divert this cash to my home mortgage, I’ll pay it off 2-years earlier and save $20,000 in interest (a 40% ROI when you think about it). The big advantage here is, as mentioned above, rental mortgage interest is deductible, where personal interest is not.
Thanks for sharing your results 2mil.
October 18, 2006 at 8:25 pm
Wow – 30%!, I thought 7% was good
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October 18, 2006 at 9:34 pm
So- is your wear and tear on the property higher with a higher number of occupants?
October 19, 2006 at 6:46 am
Thanks for your comments 2mill and Danielle.
2mil – the 30% includes the principal applied to the property as well. So, if you were to include this, you would see almost a doubling of your ROI (by my very rough estimate).
Danielle - That is one of the major risks to having student rental properties. Your tennant turnover is much higher, so you would expect some additional wear-and-tear. Last year the tennants destroyed the storm door while moving out and put a hole in the wall. This was with 5 female students, not 5 rowdy guys (someone tripped and fell into the wall). However, the damage for the 8months totalled about $400, I would estimate, and the income totalled $8000. So I would say it is a small price to pay.
The main thing is that you need to select your tennants as carefully as possible.
NG