Calculating your Rate of Return

I will start this by saying that there are many different ways to calculate your rate of return. Options can vary from the very basic to emphasis on the minutia including the individual water bills and electrical bills.

The way that I was always taught was to calculate your cash on cash rate of return. This answers the question of how is my money doing within this property/asset. However, this formula is useful for calculating your own rate of return as opposed to the more open ended understanding of how someone else might view it. Because of this gap, I think that these are the two iterations that are most valuable. I’ll start with my own property.

First, I bought a property that was not upgraded or remodeled. Second, I lived in and remodeled the property before moving out and turning it into a rental property. These numbers are likely to seem better than average given those circumstances.

My numbers look as follows if you’re using cash on cash rate of return:

(rental income).  (mortgage payment).          (HOA)       (property taxes)

6500(12).            –          2800(12)           –         450(12)      –      1000(12)

100,000

78000- 33600 – 5400 – 12000

100,000

27000

100,000

=27%

I didn’t purchase the property for $100,000 which is why I have my mortgage payment included. The alternative is to calculate the rate of return on a more basic level. In this context, it would look as follows:

Rental Income   Purchase Price

[6500(12)].    /.    $700,000.    =.    11%

Both systems are accurate. On a personal level, I think it’s valuable to calculate your own numbers. Calculating a rate of return on a more basic level affords you the opportunity to compare your property to others more effectively for if you are considering buying or selling.