Author Topic: How to compare an existing rental with assumptions about investment return?  (Read 490 times)

neo von retorch

  • Magnum Stache
  • ******
  • Posts: 3653
  • Location: SE PA
    • Fi@retorch - personal finance tracking
So I know I've heard that "cash flow is king" when it comes to analyzing a rental, but I guess I was just stubborn. Up until this year, the rental was netting about $6k in profit. The way I calculated that was "all expenses" - not including the mortgage payment (P&I) but including the mortgage interest. So ignoring that principal pay off meant ignoring money that could be invested but instead was just put towards equity. Looking just at the profit number, it wasn't too hard to say that $6k / year reduces how much I need invested by a whopping $150k. And considering that I have something like $75k in equity in the house (assuming very little appreciation since my 2007 purchase, fees that will be lost selling the house, and costs incurred to prepare it for sale and deal with inspection) I assumed that the rental income would easily trump selling the place and investing the proceeds. But something itched my brain the other day, and I thought about how each month, I'm putting that money towards a mortgage and not investments, and I thought there could be something wrong with my analysis. So I decided to create one of my infamous (not really!) brute force forecasting spreadsheets. With my early assumptions, selling was a clear winner, but I went back and verified some numbers from the past few years, made some adjustments, and it's actually still quite a wash. By the time the mortgage is paid off in mid-early 2026, I could have ~$150k invested or a house with a little over $150k in equity, but producing rent - and finally being cash flow positive most months. This used 2% annual appreciation, even though I didn't run that number back from 2007, so there's probably some adjustments to be made there.

So at the point of mortgage pay-off, the rental would be spitting out ~$7800 in annual cashflow but if I sold now, invested the proceeds and all the cashflow going forward, I'd have about $11,500 investment gains each year. So I think that's the clear winner, because the equity in the rental will forever be "stuck" where I can't do anything with it except collect rent. Does anyone want to take a look at my spreadsheet, ask pointed questions, and make suggestions?

Some information that isn't readily apparent from the spreadsheet:

Purchased in 2007 for $155,900.
Zillow current estimate is $191,991 which I think is really optimistic. It does not have a garage, which makes it harder to sell in that area. Additionally, there has been water damage in the basement including but not limited to - removing all the trim and carpet that helped it look like a finished basement. The driveway and deck are both in pretty poor shape and would detract buyers and/or require work to sell. I am assuming I'd sell it for more like $165-170k right now.
Mortgage balance is $73,950.06 - payment is in spreadsheet, 3.375% interest and 924.58 P&I payment.

2018 was a very bad year for rental expenses. So far $6100 in maintenance. (Attempts to repair water filter system, new filter system, sump pump, landscape cleanup, lawn care...) Also spent $750 for "property management" but that was kind of a bust / waste of money. That has been discontinued, while MvR and I are handling it. So, not including principal payments, total expenses YTD are $16,789 while income has only been $14,670. Add in principal and you see how bad the cash flow situation is.