The Rental Denominator for "The American Dream"

Many times a year, we hear the question “Can we afford to buy a cabin in the Mountains”? For many, this is a question of the “American Dream”. This dream could come true more often if the distinction between “price of property” and the “cost of ownership” was clearly understood.

To illustrate the difference, lets examine these general cost figures based on estimates:

Purchase Price	$300,000
10% Down	- 30,000
Mortgage amount borrowed	$270,000

Annual Mortgage Payments    

(30 Years at 6.2% interest)	$19,844
Annual Expensed (estimate)	$16,000

(Taxes, insurance, utilities, maintenance and management expenses)

Total Annual Expenses

$35,844

The advantage of the weekly rental income added to the tax advantage is the secret of the "rental denominator" that makes this home more affordable.

Example of Projected Rental Income (18-26 weeks/year)	$25,000
Out-of-pocket cost (before tax savings)	$10,844 ($903.66/month)
Projected tax savings (30% tax bracket)	- $5,150
Annual cost after tax advantage	$5,694 ($475/month)

The out-of-pocket cost of $475/month for owning a vacation rental priced at $300,000 could be well within the affordable price range. The dream of owning a mountain cabin could be within reach.

Other factors affect rental return on investment and monthly costs. For instance, 1) A higher down payment will reduce monthly costs, 2) Over the years, mortgage payments are fixed, but rental income can go up, 3) Eventually, the property will be paid off with less investment on your part. Add to all of these factors the traditional hoped for “appreciation”, and you will experience the “leverage” we understand in real estate.

There is always a risk of investing, and the intent here is not to over simplify. With today’s low interest rates, the benefits of rental income, combined with the tax advantages, the “American Dream” can be the affordable dream come true. Put the “rental denominator” to work for you.

Lynda Bennett 10-23-07