# What are the basics of apartment rental finances?

During the last few weeks I have been reading on rental yield and other rental finances questions.

I own a property that I have been keeping above the water by putting money into it. The mortgage payment is about 17% more than my rental income. This does not include maintenance costs.

The reason I have been keeping the property is because the economy in that region is very weak and probably the condo value has lost 2-5%. So I thought to keep it around until (a) I need need it back for myself or (b) the market improves.

The property has been rented for the last 3 years without any glitches.

I am looking to learn the basics of rentals in term of finances so that I can make a good decision. What are the basics of apartment rental finances? Any formulas, Excel spreadsheets or other material is also appreciated.

Example 1:

Assume there is no mortgage payment. For sake of simplicity let's say the value of the property is \$100,000. 8% year return on that investment is \$8,000 a year. Using @Chad formula below - \$666.67 (8%/12 of investment) + Monthly Costs = Rent you need to charge.

Based on the example above - If I want to know the return on investment for \$100K income home - the formula will be

(monthly rent - monthly costs)/(home value)* 12 months = Yearly % of Return

Is this a correct assumption?

• Now that the question has been pushed to top of page again, I can’t help but wonder how you’ve done these 6 years. Did the house survive the storms? – JoeTaxpayer Apr 15 '18 at 13:15

Well for starters you want to rent it for more than the apartment costs you. Aside from mortgage you have insurance, and maintenance costs. If you are going to have a long term rental property you need to make a profit, or at a bare minimum break even. Personally I would not like the break even option because there are unexpected costs that turn break even into a severe loss.

Basically the way I would calculate the minimum rent for an apartment I owned would be:

(Payment + (taxes/12) + (other costs you provide) + (Expected annual maintenance costs)) * 100% + % of profit I want to make.

This is a business arrangement. Unless you are recouping some of your losses in another manner then it is bad business to maintain a business relationship that is costing you money.

The only thing that may be worth considering is what comparable rentals go for in your area. You may be forced to take a loss if the rental market in your area is depressed. But I suspect that right now your condo is renting at a steal of a rate. I would also suspect that the number you get from the above formula falls pretty close to what the going rate in your area is.

• Thanks Chad for the formula. If I include my maintenance cost and additional expenses my % goes to -27% :( - So do I consider anything else like the fact that I am still keeping my equity on the house? – Geo Jan 31 '12 at 20:30
• @Geo - I updated the answer to address your question. – user4127 Jan 31 '12 at 20:52
• Remember that selling at a loss is allowed, and the best option under some circumstances. 2-5% below what you paid for it will likely cost you less than 1 year of mortgage interest. Its value may increase, but there are plenty of other assets you can buy that can also appreciate (stocks, bonds, savings accounts). Do you really expect the condo - a single, indivisible asset whose value is likely tied to the same local economy that employs you thus concentrating your risk - do you think it is safer, or will earn you more money in the long run? If not, toss it! – fennec Feb 1 '12 at 2:23

Commercial Real Estate is valued via the formula:

Net Operating Income (NOI) / Capitalization Rate (Cap Rate) = Market Value

NOI is just the Income less Expenses (not including any debt service).

Capitalization Rate is a % tied to local market, current stock market returns, etc.