How Do You Calculate a Rate of Return for a Rental Property?

Suppose you purchased a rental property for $200,000 and spent $5,000 in fees associated with the purchase in January of 2012.  Furthermore, suppose you put $50,000 as a down payment.

If the property rented for $1,800 per month and the mortgage was $1,200, how do you calculate the rate of return?

On top of that, lets say that you paid $1,200 in property taxes for the year and $950 in insurance and had a repair of $1,200 in mid July.  With all of these expenses, how do you calculate the rate of return?

If you add appreciation on the home along with depreciation for tax purposes, this complicates things even more.  We will assume the equity increased by $3,000 for the year, from paying down the mortgage and will calculate for one year.

You made $600 for 12 months which is $7,200.  Minus other expenses and adding equity you made $6,850 for the year.  Since you spent $55,000 to purchase the home this is a return of 12.45%.  Note that the figure of $55,000 would increase if you had to pay upfront for taxes, insurance or other expenses.

Check out a rate of return calculator at www.calcxml.com.  Thanks for reading!  Check back soon to see how to include additional years.

This post was reposted from http://finlit.biz/retirement-2/how-do-you-calculate-a-rate-of-return-for-a-rental-property/, originally written on January 30th, 2013.