Posted by Sir Four at 11:44am Sep 15 '09Not being schooled in the math of accounting, I have a difficult time evaluating how good of an investment a rental property is. There are some confusing factors at play.
The premise is simple: you buy a house, making your down payment and then paying a monthly mortgage payment. You find a tenant, and collect a monthly rent. Ideally, the monthly rent matches or beats your monthly mortgage payment. But it doesn't necessarily have to to be a good investment.
Here's where it gets confusing, though.
The amount you put down on the house gets tied up in equity, and there is an opportunity cost since you are not investing that money elsewhere (stocks, gold, loan-sharking, whatever). The more you put down, the lower your monthly mortgage payments are, but it's that much more of your money getting tied up. However since house prices should roughly rise with inflation over the long term, the equity in your house at least grows with inflation. You're still losing out on this money, though.
There are also tax considerations. You can deduct mortgage interest and insurance, as well as depreciation (I don't really understand this).
And one of the more interesting points to consider is that on a fixed payment loan, your monthly mortgage payment will appear to shrink over time due to inflation (that is, $1,000 a month ten or twenty years from now will not be as much money as it is today). But rents will likely rise with inflation. So if today your mortgage is $1,000/month and you collect $900/month in rent, in 20 years you might be collecting $1,500/month in rent while still paying $1,000/month in mortgage. Obviously time works in your favor.
However all these variables make it quite confusing to calculate what your actual advantage is in owning a rental property.
The premise is simple: you buy a house, making your down payment and then paying a monthly mortgage payment. You find a tenant, and collect a monthly rent. Ideally, the monthly rent matches or beats your monthly mortgage payment. But it doesn't necessarily have to to be a good investment.
Here's where it gets confusing, though.
The amount you put down on the house gets tied up in equity, and there is an opportunity cost since you are not investing that money elsewhere (stocks, gold, loan-sharking, whatever). The more you put down, the lower your monthly mortgage payments are, but it's that much more of your money getting tied up. However since house prices should roughly rise with inflation over the long term, the equity in your house at least grows with inflation. You're still losing out on this money, though.
There are also tax considerations. You can deduct mortgage interest and insurance, as well as depreciation (I don't really understand this).
And one of the more interesting points to consider is that on a fixed payment loan, your monthly mortgage payment will appear to shrink over time due to inflation (that is, $1,000 a month ten or twenty years from now will not be as much money as it is today). But rents will likely rise with inflation. So if today your mortgage is $1,000/month and you collect $900/month in rent, in 20 years you might be collecting $1,500/month in rent while still paying $1,000/month in mortgage. Obviously time works in your favor.
However all these variables make it quite confusing to calculate what your actual advantage is in owning a rental property.