How To Calculate Rental Property Income

First, congrats on owning a place!  Good job saving that downpayment and making those payments!  So now you want to rent out your place, but how much is it going make ya? (or cost ya?)

Renting Out My Apartment

I’m looking into renting out my condo and become a landlord, so let’s start calculating.  I’m going to use the numbers that are applicable to me, but depending if you’re a baller or not, you maybe have more taxes that are owed.  Here’s a picture of my apt!

First, the rental price for my unit will be $2500 per month which is $30,000 a year.  Yes $2500 is crazy high and I personally never paid that much in rent, but that’s the going rate for my condo now-a-days. I’m going to run the numbers by year and then divide by 12 months at the end to get a monthly break down.

Deductions I Can Take:
  • Property Tax: $3600 per year
  • Home Owners Association Dues: $384 * 12 mo = $4608 per year
  • HO6 Condo Insurance: $600 per year
  • Interest On Mortgage: $6800 per year (I still owe a lot on my mortgage ?)
  • Property Manager: $30000 * 6% = $1800 per yr
    • My property manager charges 6% and is awesome.  Worth it in my case, but you can DIY and save some money.
  • Depreciation: $200,000 / 27.5 yrs = $7272 per year
    • Where did I get $200,000?  On your property taxes, your property is broken down into 2 assets: Land and Improvements.  Your land does not depreciate, but the improvements on it (the actual structure) does.
    • Why 27.5 years? You got to ask the IRS, but for residential properties depreciation occurs over 27.5 years and for commercial properties it’s 39 years.
    • Since my unit is a residential property and the improvements value on it is $200k, I get $7272 depreciation deduction per year.
  • Costs for visiting, maintaining, marketing, meals, etc: $1000 / year
    • I’m just renting out my unit so i had to fly in, replace a few parts, do some maintenance, and I get to deduct 50% of my meals while i’m doing this. ?

First The Taxes

So totaling up all the deductions, gets me $24,680 in deductions. I’m charging $30k for rent, so:

$30000 – $24680 = $5320 profit in the eyes of the government. That means I get taxed on passive income of $5320 by federal government and the great state of California.

I am currently taking a break from work and therefore only worked a half year.  So i’m expecting to be in the 25% federal bracket.  My wages were earned in NY where i’ll pay state taxes, but my property is in California where I will only make money on my rental putting me at the 1% tax rate.

So $5320 * 25% + $5320 * 1% = $1383.20 in taxes.

So depending if I accrue more expenses, I may be able to deduct more when tax time actually rolls around. Also rental income is classified as “passive income” and therefore you do not have to pay the self-employment taxes usually associated with Business Income.

So how much did I make?

I am collecting $30,000 physically and I have a lot of expenses and taxes.

Rent Collected $30,000
Mortgage – $11,040
HOA – $4608
Property Tax – $3600
Insurance – $600
Property Manager – $1800
Maintenance – $1000
Taxes – $1383.20
Total $5968.80

So i’m going to make $5,968.80 for the year if I have no vacancy and no more maintenance. That comes out to $497.40 / month.  On top of that I do “earn” equity towards my house as the mortgage I subtracted above includes both the Principal and Interest.  The equity I earn would be around $4,240 putting my net gain at about $5968.80 + $4,240 = $10208.80 per year.

Next Year For Me

Next year, I may not work a waged job, so that would bring down my federal tax rate to 10% ($585.20 in taxes rather than $1383.20).

But was it all worth it?? What if I just sold my unit and invested the proceeds into the market. That will be my next article.

 

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