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

This is a follow on from an earlier post. This time we will start with the assumption that there is $58,000 put into the home, $5,000 from closing costs, $50,000 from a down payment and $3,000 equity built in the first year.

We will also assume the same rent price of $1,800 of which $1,200 goes to the mortgage.  We will also assume taxes and insurance remained the same, totalling $2,150.  Finally, we will assume that the property had a four month vacancy and a maintenance of $600 between tenants.  Now what is the rate of return?

For this year, there was $4,800 income and $2,750 of expenses leaving a profit of $2,050.  Assuming the equity in the second year built by $3,100, this leaves a profit of $5,150.  This is a return of 8.87% on the $58,000 put into the home.

Notice that the calculation used $58,000 since there was the option to invest this money somewhere else.  For instance, if another investment could be used to take $43,000, which might be after paying $15,000 to sell the home, and make more than $5,150 it would have performed better for the second year.

Now, the question remains.  You made 12% the first year and 8.87% the second year.  What is the overall rate of return for the two year period?  Any takers?

Read more about real estate at www.retailinvestor.org.

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