This was an answer I gave on Quora.
Let me give you an example of my first rental property. I purchased it about 5 years ago.
It was $65,000 and all I could qualify for was $70,000. I put $3,000 down and rolled the $2,500 in closing costs into the loan.
My payment was right at $500 per month. I rented it out 3 days after I bought it for $750 per month.
For the first year, I had no problems with the property. That means that I got back $3,000 the first year…a 100% ROI.
The next year, I had a roof leak that damaged the ceiling in the dining room. I paid someone to fix the roof ($250) and did the drywall and painting fix myself. But if I had paid someone it would have been around $500.
The tenant moved out. I got new tenants at $800 per month.
ROI (on the cash out of pocket) for the second year 75%.
Expenses for the third year: $100 fridge, $350 water heater, $250 miscellaneous.
ROI for the third year 76%
Fourth year. I got some bad tenants in the property, I should have evicted them much sooner than I did but they kept paying so I let them stay.
ROI for the fourth year 100%
Fifth year. The bad tenants quit paying. I had to evict them. It took 2 months and no rent received during that time. The property was totally trashed and I ended up having to do major work on it.
Repair bill $10,000. I did a lot of the work myself. I gutted the drywall, ripped out the kitchen, pulled up the carpet. I installed an IKEA kitchen myself, installed the trim, bathroom fixtures and painted. I had someone else do the drywall and the carpet. If I had paid someone to do everything it probably would have cost me another $3,000.
The remodel took me two and half months. That means no rent for almost 5 months. When all was said and done, I re-rented the house for $900.
That means this year would have been a $13,000 loss.
ROI year five -$433%
So, at the end of 5 years, when all was said and done, I had a $2000 out of pocket loss.
That means after 5 years of ownership, with some big headaches along the way, I have spent $5,000 and gotten no tangible returns. Would I say it is worth the headaches? YES!
Why? Because of the equity growth.
In the last 5 years, the amount owed on the home has gone from $65,000 to $57,000. That’s a gain of about $8,000.
So that’s pretty good news. That means that between the principal pay down and the month cash flow, I have about a $6,000 profit. That’s a 200% ROI over 5 years, or about 40% per year…not bad.
But here’s where the really good news comes in…In the last 5 years, the property has gone from a value of $65,000 to about $115,000.
That’s a gain of $50,000!
If I sold the property today, after fees and commissions, I’d receive a check for around $50,000.
My $5,000 out of pocket turned into $50,000 over the course of 5 years.
If I had managed my property better, I would have an even higher gain, and I would have had much fewer headaches (most likely.)
But I learned a lot and I still increased my net worth by 50 grand in the process. And as long as I do a better job managing the property, it will continue to go up in value, my loan will continue to be paid down, and I’ll have $400 cash flow coming in every month.
Is owning a rental property worth the headache? I cannot answer that for you. But I CAN answer it for me. This property has been a headache. But has it been worth it? Without a doubt.
To read about how the story that led to the purchase of this property…click here.