I have been recently contacted by a reader asking for
a help to analyze results of investing into 2 condominiums (apartments).
Here is the input data (story):
Apartment #1 (Apt. #1) - initial investment $ 56 K back in
2005 and additional amount of money in 2010 - $170 K.
Apartment #2 (Apt. #2) - investment $ 170
K in 2010.
The questions are:
-
Whether the investment in the real estate worth it and what is rate of return
(ROI)?
-
What to do next - sell them or keep as rental properties?
Rate of return (ROI) results are presented in table below:
In today's money inflation adjusted
cumulative investment in Apt.#1 is $ 266 K, Apt. #2 - $ 192 K. This you would have if you would put money in TIPS (Treasure Inflation Protected
Securities).
Should the same money had been invested
in an S&P 500 ETF the value would be $540 K, if the reader invested in Apple ® net worth be $4,364,000.
Market value of the apartments today is $ 466K and
$200K. Difference between investing in S&P 500 and the market value
$ 126 K. Apt.1 is generated annual return of 9% above inflation rate, while
Apt.2 only 1%.
The next question is - to sell the
apartments or rent them out?
Current assumptions :
- Occupancy rate. Apartment is rented out
11 months a year.
- One month rent is paid to an agent -
apartment management.
- Income tax on the rental money - 15%.
- Condos have to be totally redecorated
every 10 years. Redecoration cost for Apt. #1 is $ 35 K, for Apt. #2 is $25
K. This would mean putting aside
annually $3.5 K and $2.5 K towards it, accordingly.
It has to be noted that it is common in
that area that tenant is paying monthly rent, while the landlord still in
charge of the utilities (electricity excluded).
That is why they are included in the calculation.
Apartment #1 (Apt. #1) renting out table:
The apartment would require additional $
65 K on redecoration.
Apartment #2 (Apt. #2) renting out table:
The apartment would require additional $
75 K on redecoration and parking lot.
On one hand rental income provides only
1.3-1.6% returns on the investments. Low - yes. This is inflation protected
income. The calculation does not take into account fact that
apartments will most likely rise/appreciate
in price over the time. It is hard to predict but historically there is
capital gain.
So for this particular scenario I would
keep the apartments and rent them out.
However each and every situation /position is unique. Should they be mortgaged it is questionable whether the apartments
would worth it (depends on mortgage
rate, buyer person circumstances, etc). Investor would be gambling on the property
appreciation, rather than income. This is not a financial advice and you do
need to seek professional help/support to seek right solution for you.
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