Author Topic: Stupid Q re: rental property math WRT principal  (Read 2103 times)

Villanelle

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Stupid Q re: rental property math WRT principal
« on: March 24, 2014, 05:45:06 AM »
Doing some math on our rental property.  When calculating the profit/loss, I've only included the interest on the loan, not the principal.  That, along with all the other expenses (manager, HOW, property taxes, maintenance, etc.) will be subtracted from the income.

Do you do anything with your numbers to consider the principal you are paying down?   That's not really an expense since it's essentially buying equity each month, but it feels wrong to ignore it entirely.  (Opportunity cost, maybe?) 

Initially, we kept it for reasons other than just making money each month, so the only question was whether we could afford it, not whether it was profitable.  That has changed and we are trying to decide if we want to try to keep it now that the other factors are no longer really in play. 

warfreak2

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Re: Stupid Q re: rental property math WRT principal
« Reply #1 on: March 24, 2014, 05:56:32 AM »
I think most landlords here would be looking for somewhere that has positive cashflow - that means month-in, month-out, the money you receive from rent more than covers the cost of paying the mortgage, taxes, insurance, maintenance, and occasional vacancies.

Technically, yes, it can be profitable with negative cash-flow since at the end of the mortgage you own a house you didn't own before. But:
a) You can probably find a better opportunity if you wait, that doesn't have negative cash-flow
b) You'll be on the hook for that monthly payment to cover the difference, for the length of the mortgage.

arebelspy

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Re: Stupid Q re: rental property math WRT principal
« Reply #2 on: March 24, 2014, 06:59:51 AM »
I count it in two places (that I can think of off the top of my head):
1) ROI (not cash on cash, but total ROI, which may include other things like tax benefits)
2) Net worth (it is just transferring from one account to the other, but that's the place where you'll track your equity).
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Nords

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Re: Stupid Q re: rental property math WRT principal
« Reply #3 on: March 24, 2014, 07:05:37 PM »
Do you do anything with your numbers to consider the principal you are paying down?   That's not really an expense since it's essentially buying equity each month, but it feels wrong to ignore it entirely.  (Opportunity cost, maybe?) 
We count that we can pay 4.625% on a mortgage (more like 4% after the Schedule E deduction) and make higher return in the stock market.  Of course if you're investing in real estate then you can probably put the rest of your portfolio in more aggressive equities and a lot fewer bonds. 

1) ROI (not cash on cash, but total ROI, which may include other things like tax benefits)

We also assess our rental property by comparing its cash-on-cash return to CD rates.  And by cash-on-cash, I mean the annual net cash on Schedule E divided into the after-tax profit (including depreciation recapture) of selling the place.  Hawaii real estate is horribly cash-intensive so our cash-on-cash return has consistently hovered around 4%.  That felt pretty stupid in 2006 but it feels pretty good today.

We've also assessed that landlording just one property is a bit more than we really care to tackle, especially when the surf is up, so I snivel & whine a lot.
« Last Edit: March 24, 2014, 07:07:42 PM by Nords »

arebelspy

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Re: Stupid Q re: rental property math WRT principal
« Reply #4 on: March 24, 2014, 07:14:09 PM »
We've also assessed that landlording just one property is a bit more than we really care to tackle, especially when the surf is up, so I snivel & whine a lot.

lol.  Mine feel like hardly any work and I have several multiples more than you.

After years of surf and ER, your bullshit bucket must be so shallow!  ;)
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.