May 15, 2013

Investment Property - Return on Invesment

I've been running some numbers to figure out if it makes sense to move forward with the purchase of another condo to rent out.

Absolute Worst Case Scenario:  We can't find anyone to rent the unit.  We would have to pay the mortgage, taxes and condo fee every month.  Not to mention not being able to recoup the money that was spent on closing costs, home inspection, and loan fees.

To figure out my return on investment I used this calculator:

I also used the following assumptions. 

Purchase Price $65000
Down Payment $13000
Closing Costs $3000
Interest Rate 3.8%
Appreciation Rate 1%
Annual Taxes $1100
Annual Insurance $300
Misc. Maintenance costs $50 per month
Condo Fees $110 per month
Tax Bracket 25%

Best Case Scenarios: If we were able to rent the unit for $800 per month, Our Return on Investment would be 27.54% with appreciation and the cap rate would be 8.58%. 

If it took us 2 months to find a renter but we were still able to rent it for $800 a month, our Return on Investment would be 22.93%, cap rate 7.35%.

OK Scenarios: $700 per month in rent, 1 month vacancy = ROI 21.19%, cap rate 6.89%

$700 per month in rent with 2 months vacancy = ROI 17.16%, cap rate 5.82%

Blah Scenarios: $650 per month in rent, 1 month vacancy = ROI 18.02%, cap rate 6.05%

$650 per month in rent with 2 months vacancy = ROI 14.27%, cap rate 5.05%

I would obviously love to get $800 a month in rent and I have seen some comparable rentals in that price range in our city.  I think we could definitely get $700 a month for it. 

So far its looking like a decent investment as long as we can rent it.  I want to sit down and actually look at the monthly income and expenses tomorrow.

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