Hey Lady!

Yes, exactly. I use the amount I could otherwise invest elsewhere. (well, no gains tax or selling fees included). It’s the amount i also include in my NW reports for this asset.

If there’s growth, include it! But, like you said, just make sure it’s fairly appraised and conservative. Making it look “too good” on paper might give yourself (and others) a brighter outlook on rentals than what’s really going on.

Cheers! Have a great week!

Thanks for the replies Joel.

1. Do I understand it correctly that you’re only looking at the equity in the duplex + emergency fund as “investment value” because that portion is what you could otherwise invest somewhere else, while closing costs etc are already gone and could not be invested elsewhere? That makes sense to me. Thanks for clarifying! I think that’s a good way to look at it on a yearly basis.

2. Thanks. I’m torn about including growth because it’s really just an estimate and could make the investment look “too good” on paper. But assuming no value appreciation whatsoever also doesn’t feel fair, that would be like counting only stock dividends but not considering value appreciation. I’ll keep thinking about this… Perhaps accounting for half the suggested appreciation is conservative but fairer… Not sure!

That means a lot coming from an experienced investor like you! Cheers! I’m definitely interested in any tax negotiating tips you have to share :)

I do agree about the property taxes going up. I think it’s just one of those things that comes with investing in real estate. I still have your idea in mind about doing a write up on protesting taxes as I’ve done it several times. I may put together an episode about my experience doing it on the podcast.

Good tip about maintaining the AC. I had one blow up a few years ago. It’s definitely a high cost item! Glad I got a new one and just replaced it.

Regarding annual reviews, I keep a spreadsheet and look at it during tax time. Something I’ve been doing over the years.

Appreciate the update on your rental duplex. Looks good to me! :)

Love this perspective! If you’re happy with the return (I’m certainly happy with mine) then that’s what matters most. Congrats on 41 years of ownership! It’s stories like yours that got me into real estate to begin with.

Cheers for writing Cornelius! (I know that’s not your real name, but thought i’d just take a wild guess)

Hey Andy! I believe it depends on your total income, and whether you’re a “real estate professional” or not on your tax filing. Here’s a cool article, check out the Potential Tax Limitations section. Anyway, if you make a +5000 profit and claim -7000 in depreciation, you may be able to use the additional -2000 to offset other regular income, etc.

BTW I am not a tax professional and I use a tax guy to figure out all this stuff for me!

Hello LadyFIRE! Love the questions! I’ll do my best to answer…

1) I bought this property in 2015, and for the first year of ownership I absolutely included my closing costs in my ROI cost basis. It was (cashflow + princ paydown + appreciation) divided by (downpayment + closing costs + emergency funds). The reason I don’t include closing costs in my 2020 ROI is because I’m only trying to calc the ROI for this year only. If I was trying to calculate my total ROI over the entire investment I would include all out of pocket costs for the life of the investment and all profit for the entire holding time. Make sense?

2) You ROE will decrease over time because your leverage is getting smaller and smaller. You can’t stop this unless you refinance over and over. I should note… I didn’t include appreciation in my figures **this year** because I can’t confirm the property went up in value this past year. But in other years I absolutely do include appreciation because that is true profit and growth (and a very large part of it). If the property raises in value from 220k –> 230k this year, I will include an additional 10k in the profit and it’ll blow out my ROI for 2021. So it’s not that I never include growth, it’s just that I didn’t this past year.

I realize calculating annual ROI each year is kind of short sighted of me, because the true return is the average over many many holding years. But I think it’s fun to review every year and make sure that things are still growing in the right direction.

Thanks! Yes actually 2020 was the first year I appealed the tax assessment. Believe it or not, this is the reduced rate! ouch.

I’ve got a feeling it will go up again this year again too. :( and I’ll appeal again at that time.

Hey David, yep, you can absolutely claim depreciation. My tax guy does this for me each year. You take the cost of the property (minus land value) and divide it by 27.5 and this is the amount you can claim. For me, I think it’s about $6500 or so we claim each year – and some other stuff so we show not much paper profit at all.

However, it’s important to learn about depreciation recapture. When you eventually sell the property (more than it’s “depreciated value”, which is usually is) you have to pay tax on all the $. you depreciated over the years. This is why I typically don’t include it as a “profit” each year knowing that it gets all screwed up and I get heavily taxed on the sale.

I bought a a 3BR duplex in 1980? (jeesh I’m old) for 70K. It’s been paid off for 25 years and I now get about 18K a year in income, netting 13K after expenses/taxes. Current value is probably around 240K. A back-of-the-envelope IRR in Excel shows an approx. ROI of just under 8%…

Yeah, maybe I should have sold it, but I’m happy with my decision. My only involvement is to look for an email around the 8th of the month saying $1400 has been deposited to my account as I have a Mgmt company taking care of it. I’m happy, and that’s all that matters…

Anyway, just my story and good luck with whatever you do,