12 July 2006

Opportunity cost of rental property

I've been putting a lot of thought into the true "cost" of renting out our house while we're in China. Assuming we can rent it out for an amount that covers our mortgage, taxes, management fees, etc, we're still tying up a lot of money in an investment that may not appreciate much over the next few years, if at all.

First of all, it's pretty clear that we'll lose money every month, sorta. We'll be able to just barely clear interest, taxes, fees, and have a little left for maintenance, but we'll still be shelling out for much of the equity portion of the mortgage payment. So while we'll be building equity, we won't be generating income. That's fine, we've only had the house a few years.

The bigger issue is the equity that's already tied up in the house. Renting out the house may not be a good investment compared to selling and investing the equity in a guaranteed investment paying 5 or 6%. If we had the house paid off completely, the rental income and investment income (at 5%) both work out to be about the same, $30K, before taxes. After taxes, it's still about a wash, with funky tax credits being the difference.

Of course, we don't have the house paid off. Our mortgage is very close to the rental income. As a medium-term investment, we'd likely be better selling the house, and investing the equity. But that doesn't take into account two things. Houses are not fungible, and we'll have to live somewhere when we get back from China. I just hope we don't lose too much on this "investment".

For another look at this problem, My Open Wallet has a great blog entry (with comments) on just this issue.