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Rental Property Income vs Expenses

2,519 Views | 19 Replies | Last: 6 yr ago by HTownAg98
chn4
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My head is spinning after doing my taxes this year....is my rental property now becoming a liability vs an asset? I mean we have good tenants and they are paying down our mortgage and we have a cash flow of over $500 per month...but by the time taxes, depreciation, interest, maintenance kick in...is this not a good investment?

Bought 3 years ago for $95K...prob worth $115K now

Nice 2 bed 2 bathroom in good part of town
1200 sq ft
Rent: $1100/month

Total income 2017: $13,200

2017 Expenses Breakdown:
Deprecation: $2814
Vehicle Expenses: $636
Property Taxes: $3403
Mortgage Interest: $3258
Homeowner's Ins: $788
Repairs, Cleaning, Maint: $3819
Total expenses 2017: $14,718

Net Income: -$1,361
jmazz
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AG
For actual cash flow #s...I think you need to take out depreciation and even vehicle expenses.

Depreciation is a tax benefit for you. You are getting to deduct the depreciation as an 'expense' when in all actuality the property is appreciating (you said bought for $95k and now worth $115k)...plus the tenant is covering your note so as each month passes you are also building equity by lowering the principal balance.

I kind of look at the vehicle expenses the same way. More than likely, you're going to have those expenses whether or not you drive to a rental property. By owning a rental property, you're now able to deduct those expenses/mileage when you might not otherwise be allowed to.

A big plus in owning rental property is getting to show a loss on taxes when really you put money in your pocket and the asset itself is increasing in value (in theory...unless it burns down or something).
Sooner Born
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The only catch with the depreciation benefit is that it is temporary. It gets recaptured(paid back) if/when the property is sold.
CS78
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JMazz said it well.

Another note that you could be concerned with. If a bank goes to review your tax return, for a possible future loan, they realize the deprecation is on paper only. They'll remove that deduction and you'll get credit for the property cash flowing.
jmazz
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AG
Correct...unless you 1031. So I look at it when that time comes (selling) b/c the equity spread over the course of ownership typically covers the depreciation recapture...at least it has with my rental property.
East Dallas Ag
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AG
30% of income for repairs/maintenance is WAY high. You should look at what is going on there - was it normal wear and tear repairs, or was it initial make-ready stuff for the 1st tenant. My guess is the latter so it really was really more of an initial capital expense and not an expected annual operating cost. If the tenant is doing that sort of damage then a deposit deduction should be involved. Regardless, that number should be much lower so look for ways to mitigate that i.e. home warranty or inserting a lease clause where the tenant pays the first $X of repairs, etc.
Aggiemike96
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AG
Just curious...but you drove about 1,200 miles to and from this property last year?
chn4
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1 trip per week (20 miles round trip) = 1100 miles

Thanks everyone. I know its a stupid question and I feel dumb for asking it. My mind is just playing tricks on me.

We had a $1500 A/C repair this year along with moving in new tenants....plus some pest control and plumbing work. So yeah I shouldnt have to spend another $3K in repairs this year.

If the depreciation and appreciation washes itself out and repairs go down, then I should be in the positive.

What is a reasonable ROI calculation people follow on a yearly basis?
AgSwagalicious
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AG
It's fine, look at it this way. He'll be providing a great buying opportunity when he eventually goes underwater
94chem
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The depreciation schedule for real estate is 27.5 years, iirc. For reference, here is a link to the DJIA annualized return over the past 27.5 years. With reinvested dividends, you're looking at about 11.2% annualized. Let's be conservative and say the number is 10%.

Of course capital gains and earned income tax laws change all of the time, but on a ceteris paribus basis, you would hope to get 10% ROI just to break even with the DJIA. Given that you are managing a rather small yet active investment (i.e. headache), versus a passive investment like stocks, I wouldn't touch it for less than 15%. Again, you may have other reasons to hold onto the property, like if you know there's a hazardous waste dump underneath it that would have to be remediated if you sold the property, or if you know the value is about to triple in the next 5 years.

Cool calculator, hope it's right
Baba Ganoush
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AG
Another question, as someone who's owned rental properties for going on 15 years, but why did you end up driving to the house once per week for a whole year? Also, based on the property taxes you listed it would appear that the taxing appraisal district thinks your house is worth more that $115, unless you live in one of those areas with very high tax rates. Not that it matters when determining cash flow.
jagvocate
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AG
Once a week is a job, not an investment.
Aggiemike96
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AG
I'm curious what requires 1 visit a week? A needy tenant or a micromanager landlord?

How much time of yours is this taking? I have a rental in San Antonio that I drive by every few months. Otherwise I leave the tenants alone.
Diggity
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AG
I go to my rental a couple of times per year.

You're doing something wrong.
Lone Stranger
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[If you post in that manner on this forum again you will get banned. -Staff]
FC12
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This thread (*was) full of **** measuring regarding how much someone knew rather than helping someone out. Thanks for the clean up!
94chem
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[Do not post in an insulting manner on this forum. -Staff]
dubi
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AG
Aggiemike96 said:

I'm curious what requires 1 visit a week? A needy tenant or a micromanager landlord?

How much time of yours is this taking? I have a rental in San Antonio that I drive by every few months. Otherwise I leave the tenants alone.
I too am a bit curious.

I'm lucky in that my rent house is next door. However I typically knock once a month and put in clean air filters. I could let them do it, but this way I know it has been done.
94chem
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I'm not the one who used profanity. That post is still up.
chn4
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Jmazz...thank you for your help. Your answer was what I was really looking for.

For everyone else who tried to make me feel stupid. Mission not accomplished...as I knew it was a stupid question and while I pretty much knew the answer anyway, I wanted to get other people's opinion who were smarter and more experienced that me.

To answer the mileage question.....I dont really drive by once a week. The house is in the center of town, so I drive by it anyway 7 days a week. I just record it as once a week.
HTownAg98
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Another thing to consider is replacement reserves. The concept is that it is an annual sinking fund of money that is set aside to replace the long lived items (new roof, new a/c, bathroom remodel, etc.). In reality, it serves to average out the cost of replacing those long lived items, since those are actual dollars that have to be spent. Regardless, it is something that should be considered.
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