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Jul 19 2010 12:00AM

Question


Do you know a good tool to do a comparison of a security investment versus a rental property? I could try to do a spreadsheet myself, but was wondering if someone could direct me to an easier tool.

Answer


“You may need to create your own spreadsheet,” said FPA member Michael E. Hardy, CFP®, of UBS, who also noted that the biggest issue is how deep you want to go in the comparison. 

“Since one of the major benefits of real estate is current tax benefits such as depreciation, a thorough analysis should be done on an after-tax basis,” he said. “But since that depreciation is re-captured at the time of sale, your analysis should be based on the entire holding period.”

It’s a bit like the difference between the current yield on a bond and the yield to maturity. “You are basically looking at an IRR, or what’s known as the internal rate of return, problem based on cash flows,” said Hardy. “Cash flows for a stock are pretty straightforward. You look at dividends. But cash flows for property are not. It reflects rent received, repairs, insurance, property taxes, maintenance, depreciation and the like. Some of the cash flows reduce the tax burden and some do not.

“Personally, I just leave the tax portion out of the equation when I do a quick analysis for myself. I just look at purchase price, cash flows and sales price to get a 'simple' look at rate of return.

“I know you were looking for a simple tool, but I think you might have to create this one on your own.” 

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