Steady rent from an income property, coupled with rising property values, can produce a rate of return far more than anything you'll get out of a bank or mutual fund. Variations among communities in terms of rental and property values, changing interest rates and different economic pictures from one community to the next make it impossible to calculate an across-the-board average return rate. What you earn from rental property depends upon several variables.
Your Investment In The Property
If you get a great deal on your rental property, your rental return rate is going to be higher. This is because the rate is calculated by dividing the total amount of rent received by the total amount invested in a given time period and multiplying it by 100. For example, if maintenance, property taxes, mortgage costs and your down payment amounted to $50,000 in the first year you owned the property and you collected $12,000 in rent, your rate would be $12,000/$50,000 X 100, or 24 percent. If higher taxes, more intensive maintenance or a higher-cost mortgage on the same property cost you $75,000, however, your return would be only 16 percent.
Your Mortgage Costs
If you're renting out a property you inherited, received as a gift or paid for with cash, mortgages won't be an issue. For many landlords, however, mortgage costs are a real part of doing business and can impact the rate of return they receive on a rental property. But while a landlord's mortgage interest can make a difference on the rate of return he receives from a rental property, it does nothing to increase the amount of rent he receives. The more money a landlord has to borrow to acquire a property, the more he will pay in loan origination fees, mortgage insurance and interest. A higher down payment can decrease a landlord's profit losses due to mortgage costs.
Your Nonmortgage Costs
Local governments are fueled by property taxes, which can vary among counties in a given region of a state. You also have to factor in maintenance and repairs (roofing, plumbing, heating and air, etc.), which you can expect to be higher on an older property than a newer one. Furthermore, you'll probably want homeowner's insurance; in fact, you'll be required to pay for this insurance if your property has a mortgage.
The rental market in your area affects your rental earnings. Being able to charge higher rent obviously means a higher rate of return, but you also have to consider the availability of tenants in a given market. Just because you can charge $1,000 a month for a property doesn't mean it will be continuously occupied during your ownership. Frequent turnover or tenants who don't pay reliably will result in more months where you receive no rent but still have to carry a mortgage, taxes and insurance.
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