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During the last few weeks I have been reading on rental yield and other rental finances questions.

I own a property that I have been keeping above the water by putting money into it. The mortgage payment is about 17% more than my rental income. This does not include maintenance costs.

The reason I have been keeping the property is because the economy in that region is very weak and probably the condo value has lost 2-5%. So I thought to keep it around until (a) I need need it back for myself or (b) the market improves.

The property has been rented for the last 3 years without any glitches.

I am looking to learn the basics of rentals in term of finances so that I can make a good decision. What are the basics of apartment rental finances? Any formulas, Excel spreadsheets or other material is also appreciated.

Example 1:

Assume there is no mortgage payment. For sake of simplicity let's say the value of the property is $100,000. 8% year return on that investment is $8,000 a year. Using @Chad formula below - $666.67 (8%/12 of investment) + Monthly Costs = Rent you need to charge.

Based on the example above - If I want to know the return on investment for $100K income home - the formula will be

(monthly rent - monthly costs)/(home value)* 12 months = Yearly % of Return

Is this a correct assumption?

Brythan
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Geo
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2 Answers2

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Well for starters you want to rent it for more than the apartment costs you. Aside from mortgage you have insurance, and maintenance costs. If you are going to have a long term rental property you need to make a profit, or at a bare minimum break even. Personally I would not like the break even option because there are unexpected costs that turn break even into a severe loss.

Basically the way I would calculate the minimum rent for an apartment I owned would be:

(Payment + (taxes/12) + (other costs you provide) + (Expected annual maintenance costs)) * 100% + % of profit I want to make.

This is a business arrangement. Unless you are recouping some of your losses in another manner then it is bad business to maintain a business relationship that is costing you money.

The only thing that may be worth considering is what comparable rentals go for in your area. You may be forced to take a loss if the rental market in your area is depressed. But I suspect that right now your condo is renting at a steal of a rate. I would also suspect that the number you get from the above formula falls pretty close to what the going rate in your area is.

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Commercial Real Estate is valued via the formula:

Net Operating Income (NOI) / Capitalization Rate (Cap Rate) = Market Value

NOI is just the Income less Expenses (not including any debt service).

Capitalization Rate is a % tied to local market, current stock market returns, etc.

Ganesh Sittampalam
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Piercy
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