Hi everyone, my wife and I are considering downsizing.  We think we're in a good financial position in general and on our current primary residence (PR) so we were analyzing renting.  When I put all the numbers into a spreadsheet, it looks like we'd get only a 2% return on our money!  

This seems wrong because the situation seems ideal for conversion to a rental: we bought in 2010 in the middle of the housing trough (low expenses), purchase and rental markets are really hot in our area, we are in one of the top elementary school districts in the city, etc (high revenues).  Since I figured out such a low return, we both think that I must have done something wrong, so I was hoping that someone could check the analysis I did!  FWIW, we would start with a management company and transition to self-managed in 1-2 years, though neither of us has any particular passion or aversion to rental management.

General details

Purchase @ $330k in 2010

Current market value: $560k

Current loan amount: $228k

Revenue

We spoke with a trusted friend who estimated that the house could rent for $2600/mo in its current condition.

Total (52 wk occupancy): $31,200/yr

Expenses

P&I: $1167/mo (~$14k/yr)

Property taxes: ~$5100/yr

Insurance: ~$1k/yr

Yard service, misc: ~$1700/yr

Management fee: 8% (~$2500/yr)

Total: ~$24.3k/yr

Taxes

Depreciation: $12k (Rough estimate found from https://www.calculatorsoup.com/calculators/financi... with cost basis: $330k, recovery period: 27.5 yrs)

Mortgage interest: ~$7900

Other deductible expenses (prop taxes, insurance, yard service/misc, mgmt fee): $10.3k

Total change in AGI = revenue - deductible expenses = $31,200 - $12000 - $7900 - $10.3k ~= $1000

We're in the 25% tax bracket, so these revenues and deductions add $250 to our federal tax bill.

Total/yr

Revenue: $31,200

Expenses: $24,300 + $250 = $24,550

Total profit/yr: $6650

Even if we managed the property ourselves, our profit would be ~$8500.

Conclusion

This is probably an optimistic analysis - it assumes 52 wk occupancy, and relatively low misc expenses.

Since we have so much equity (~$330k), our return would be in the 2% range (managed) or 2.6% range (unmanaged).  This seems like an extremely low rate of return.  

For comparison, if we sold and downsized to a house at $440k with $110k down + $15k closing and 5% realtor fees, we might net ~$180k.  Even if we put $80k into the new house in renovations, we could invest $100k in stocks (avg return of 8%) and make $8k... that's nearly as much as managing the rental ourselves, with a lot less effort and a lot more upside.

Can anyone please point out any errors in my analysis?  It seems like, even though we can rent for way more than our expenses, in terms of rate or return and absolute return this is not clearly a better investment than stocks.  In fact, in a lot of ways it's worse.

Also, I have all of this in a spreadsheet so if you want me to rerun the analysis with different numbers (misc expenses higher/lower, rent higher/lower, mgmt expenses = 0, etc) let me know and I'll do that.