When analyzing rental real estate returns you should at least consider the tax implications and the cash flow. Over time, I have changed my analysis approach here and there but I do like to keep it pretty simple still. You can get bogged down in the analysis if you get too in-depth on it. The best deals will sell quickly in about any market so it helps to see a quick summary to at least offer on a property. Usually this analysis tells me enough to buy something based simply on the below. I have set this up in a template so I can just update the Assumptions and everything self-calculates. No matter how detailed you get, the real life numbers will be different anyway. Keep in mind this is assuming zero vacancy and no turnover costs, that is why I have it calculate the monthly carrying cost if vacant because that will help you determine how much cash to keep in reserves (see the prior post on vacancy and turnover costs if you haven’t yet).
So here it is, my summary Rental Analysis (best viewed on a desktop/laptop/tablet). I updated the Assumptions on the right side and it self-populates the left column. Feel free to reach out if you want a copy of the file itself to get all the formulas!
| Rental Analysis | |||||
| Rent | Assumptions | ||||
| Tax Implications of Rent | $1,650 | Monthly rent | |||
| $0 | Mortgage principle | ||||
| $19,800 | Annual rent income | $3,430 | Maintenance costs | ||
| ($2,727) | Depreciation | $0 | Principle and interest on mortgage per month | ||
| ($3,430) | Maintenance costs | $4,500 | Annual home insurance and property taxes | ||
| ($4,500) | Annual home insurance and property taxes | $0 | Annual mortgage interest | ||
| $0 | Annual mortgage interest | 25% | Incremental tax rate; 5% State and 20% Federal | ||
| $9,143 | Annual net taxable income | ||||
| $75,000 | Purchase Price + Capital Improvements | ||||
| 25% | Incremental tax rate | ||||
| $2,286 | Estimated taxes on rental income | ||||
| Cash Flow of Rent | |||||
| $19,800 | Annual rent income | ||||
| $0 | Annual principle and interest on mortgage | ||||
| ($4,500) | Annual home insurance and property taxes | ||||
| ($2,286) | Estimated taxes on rental net income | ||||
| ($3,430) | Maintenance costs | ||||
| $9,584 | Estimated annual net cash flow | ||||
| $661 | Monthly carrying cost if vacant | ||||
Have you ever used Fundrise? Do you know what kind of returns you can make from real estate crowd sourcing site like that?
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When owning real estate I prefer to own it outright vs in a fund of sorts. There seems to be a lot of crowd funding options coming about recently for sure. I would compare them to REITs personally in terms of risk and returns.
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I think they make a good alternative when you don’t have the capital to fund real estate out-right.
If you or any of your followers have invested in crowd funding real estate I would be interested in hearing about your experience.
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We’d also like to add that when investing in a real estate fund, you aren’t getting all of the great tax benefits you would if you were to own real estate directly.
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Good article. I like the break down of the numbers. I love spreadsheets and numbers. I have been in real estate for about 12 years and I like every side of it.
Matt – reinvestwise.com
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Thank you for providing so much useful information, it is awesome.
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