How do I calculate ROI on a rental on something I bought over 20 years ago?

Question

Every calculator has stuff that seems irrelevant or is not true to the situation.  My purchase price was over 20 years ago, I do not remember closing costs, have refinanced twice at least and I have been renting it for almost as long.  Lots of schedule Es I can not read or understand.

I obviously know my rent "income" and my costs (especially since I make NO positive cash flow money on it and mostly loose money (last year I lost "only" -$1175) so i want to know what i made in appreciation versus how much I lost per year for the past 20 years.  And how much opportunity cost i lost had I been in the market. At this point I will have pick up about $450K in appreciation after sales costs, but that is before taxes and I am in a high bracket.  Basically I want to know how much damage i did to myself for.....reasons.

How does one calculate this? I know I should not have counted on appreciation and I think I been loosing money on it for a very very long time, but I had other things to attend to. I know, I know, first world problems for sure but I loath the thought of the hassle of selling but its time.
(RE certainly did NOT make me rich as I had hoped and now I am ready to sell 2 rentals and retire sooner than later)

Nathan Gesner · Answer

You are in Corte Madera, California, right? Rent rates have probably tripled in the last 20 years. The only reason you are losing money is because you (a) haven't increased rent rates, or (b) cashed out your equity and increased your expenses.

The average home in your market was $400,000 20 years ago. It's now $1.1 million. After paying down your mortgage for 20 years, you should have $1 million or more in equity.

To answer your question, I think you should learn how to calculate return on equity (ROE). Here's a short video from BiggerPockets:

Bill B. · Answer

Sell. Give $60k to the feds for capital gains tax, give them $75k for depreciation recapture, give the state government $65k? Put the remaining $200k in the bank and earn $10k/yr guaranteed. (5x what you say you’re earning now.) and you don’t have to make a house payment on your other home any more as it will be paid off.

Otherwise hold it until you die and leave it to your kids tax free, saving $200k. But it is currently a bad investment based on your ROE. You are earning less than 1/2 of 1%. (Not considering the other mortgage payment.)

Mike Dymski · Answer

Your return for the past 20 years has been approximately 30%.  Your potential ROE going forward is...

Annual cash flow = $2k

Mortgage principal pay down = ? (this is your mortgage payment excluding interest, taxes, and insurance for the year)

Annual appreciation = ? (not the $470k from the past...what you expect on an annual basis going forward)

The sum of those three annual items is the numerator in ROE (the "Return" portion).

Divide that by your Equity which = $469 ($850 property value - $381k current debt)

Mike Dymski · Answer

You're great...you purchased a house for $335k and it's now worth $825k.  Using 25% or $84k as an assumed down payment ($335k x 25% = $84k) and $24.5k of appreciation per year ($825k current value - $335k purchase price = $490k appreciation / 20 years = $24.5k per year appreciation), you have an annual return of 29% on appreciation alone ($24.5k appreciation / $84k down payment = 29%).  That does not include mortgage principal pay down or annual cash flow.  Appreciating coastal properties are perfect for hands off investors...set it and forget it...no need for precise execution.

Ignore the past.  Calculate your current ROE and assess it relative to other investment opportunities.

ROE = (cash flow + mortgage principal pay down + appreciation) / (value - current debt)

Bjorn Ahlblad · Answer

I sold rentals and my primary in the San Francisco area a few years ago when we moved to Wa. I went through an 'interview process' with my accountant and he had me produce paperwork demonstrating income and expenses for each. These were long time holds as long as 35 years.

Pretty soon you will arrive at the required numbers including your tax exposure for Ca state income tax, make sure you are sitting down for that part.

It is all covered by the video above and your accountant. All the best!

Matthew W. · Answer

I am not tight on reserves or cash, comically that is actually my  "problem" as it made me lazy.  This property has been so hands off I have not thought about in years like I should have and i do NOT have the time to educate myself to say the least (I run a company).  In theory I pay others for this, but my CPA has not said anything - he blindly fills out schedule Es and I blindly pay my taxes, nor did the FA i paid $2K to look at my stuff raise an alarm.  The only reason this came to light was I was looking to buy a different primary home and it got me looking at this!  So to your point I am ready to admit it might not be the best thing for me to have so much money plunked into.

Allan C. · Answer

@Matthew W. I think you’re making it more complicated than it needs to be. Forget about the past and figure out the present and future potential. At the moment you have negative cash flow, which isn’t great. However, it doesn’t mean you have negative return. You are paying down principal and that goes into your ROI calc.

You should focus on a return on equity formula, which uses the asset value less loan value as the denominator. The numerator will include your cash flow and principal pay down. If you think there’s good future appreciation potential, then that’s a reason to hold onto the property.

However, if you don’t have reserves and are tight on cash flow, it’s likely best to just sell and get into something that better suits your investment style. It seems you got lucky in the past, but unless you’re willing to put a lot more time educating yourself it seems REI may be challenging for you.

Matthew W. · Answer

I watched that video and it still was difficult to apply to my situation.  I think the biggest issue is they all start with a "Cash invested" amount and I have no idea what mine is at this point so I am lost out the gate.   What I could follow was that if the property is worth $850K and I owe $381k on the mortgage, and my cash flow is -$1773, then even when using his equity formula, I have about a -.00375 return on my investment.  Seeing it that way, it is even worse than I thought.  Considering I have had negative cash flow for years holding on to this thing looks to have been a terrible financial decision.   The part I don't yet understand is that if I had a tenant paying my mortgage for me for years, and it ALSO gained equity, how I am so far off any ROI.  I think to really figure this out is I  need to add up all my expenses  paid for 20 years, (negative) then add in all my rent proceeds (positive) and then ADD the equity and that is my 20 year return.

How do I calculate ROI on a rental on something I bought over 20 years ago?

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