## Calculated the Return on Investment for the California Rental Property

November 21st, 2011 at 04:23 pmI had a really big revelation this weekend regarding the rental property in CA. I wanted to share it, I doubt it’s a new perspective but it was a new to me perspective.

I have been debating about whether to keep or sell a property I inherited in California. There are pros and cons to both decisions, but a decision needs to be made soon because my renter is leaving in January.

I was trying to determine long term gain of the property if I decide to keep it. To look at the future, I looked at the past.

There are some assumptions at play here, but even being very cautious, the numbers kind of blew me away.

My mom bought the place in 1976 and lived there for 2 years before moving in with my dad in another town. She bought the place for $45,000. This property has been in the family for 35 years.

I assume there was a mortgage, so here are the assumptions:

Assuming she put 20% down, she had a mortgage of $36,000.

Assuming she had a 10% mortgage interest rate (I heard that rates were in the double digits in the 80’s. I’m not sure about late 70’s.

Assuming it was a 15 yr mortgage (I have heard the 30 yr mortgage is new?) She paid $78,080 total for her condo. Taxes are fixed at $1200 per year so in 35 yrs she has paid $42000 in taxes. In total, the place has cost her $120,080 plus HOA fees.

She has rented the property for 33 years. Rent goes up so I have no way of knowing what she has charged through the years. Right now the property nets (after HOA fees) $1250 a month. I’ll assume her rental income has averaged a net of $800 a month.

$800/month x 12 months =$9600 year. $9600 x 33 yrs = $316,800.

The property has brought in $316,800 and cost $120,080. Over the years, my family has had a $196,720 income boost from the property. And then on top of that- it has appreciated to a value of about $440,000! So with realtor fees and closing fees and fix up fees, we’ll say the property will net $400,000 after the sale.

So with the property equity and rental income, this little condo has given my family $596,720!!

Is my math right on this? Is my line of reasoning correct?

And I do understand there were vacant months where no money came in, things broke, needed repair. But even rounding down to $500,000. Whoa! That is serious money!

Now I can better understand why long term real estate can be so lucrative for long term investments!

Seeing the long term return on investment numbers are a bit more crazy than just considering how the monthly amount might impact/help your budget.

In this case, it pays to be patient with the real estate market.