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## Using rental income to improve returns

Note: You can use any financial calculator to do this problem, but if you want the BEST, you can get our 10bii Financial Calculator for iOS, Android, Mac, and Windows!

THE SCENARIO Let's say I bought a house in an installment sale over the course of a decade, and I want to make 9% on my money. In order for that to happen, the house would have to be worth \$145,135 at the end of the decade, but appreciation fell short of my expectations (only averaging 3%), and the house is worth \$121,442 instead. However, now I have a rental house that's free and clear (i.e. there's no mortgage on it). I can net* \$1150 per month in rent from the house, and I plan to sell it after 5 more years of appreciation. The Question: What would the house need to be worth after 5 years, in order for my total investment return to be 9%? Assume that rent stays the same throughout the 5 years. * Remember that properties always have additional expenses, from vacancies, maintenance, property taxes, insurance, management, and so on. For this situation, assume that after all of that, I get an average of \$1150 per month in rental income throughout the 5 years I'm going to hold the house.
THE SOLUTION Since we're talking about total investment return, I need to assume that my initial investment value is \$145,135 (not the \$121,442 that the house could currently sell for). That's because I need to get a 9% return from this point on, but also for the time leading up to this point. And in order for that to happen, my investment would need to have a value of \$145,135 today. First things first, make sure the calculator is using 12 Payments per Year. N: 60 (I'm going to sell the house after 5 years) I/YR: 9 (My desired return) PV: -145,135 (The value of my current investment in the house) PMT: 1150 (My net rent per month) FV: (this is what I'm trying to find)

In order for my total investment to yield 9%, the house would need to be worth \$140,497.36 after 5 years.

One of the benefits of rental properties is that even if appreciation doesn't lift the values as much or as fast as you'd like, if they make you money month-to-month, you can sometimes wait (while collecting rent) for appreciation to get to the level you want. So even if Plan A doesn't work out, there can be a reasonably attractive Plan B.

What do you think? Is owning a rental house free and clear something that you think might be of benefit to you? Let us know in the comments!