The ability to evaluate deals is crucial to the success of any real estate investor. Whether you are deciding if you should move forward with a deal or simply evaluating an existing property, a thorough rental property analysis is key. Luckily, with the right rental property calculator, making those choices becomes easier. So if you want to find the best investment properties with the most attractive profit margins, try using the following calculations to analyze your next deal; you might be surprised by what they can help you predict.
Getting Income From Rental Properties
Rental properties have become synonymous with today’s greatest wealth-building vehicles. Few (if any) exit strategies have proven to be more lucrative over long periods of time than investing in rental properties. If for nothing else, the wealth generated from rental properties can be extrapolated over a lifetime, and even generations. If a rental property is placed in service, it has the potential to generate cash flow. It is entirely possible, in fact, for the cash flow generated from a rental property to pay off monthly mortgage operations, and then some. Therefore, landlords may simultaneously pay their mortgage with someone else’s money and pocket a little profit each month. Additionally, each payment made on the mortgage will increase the owner’s equity in the property.
It is worth noting, however, that income is not limited to cash flow and equity. Owners may increase their profit margins by using rental properties as a tax shelter. Thanks, in larger part, to several tax benefits awarded to rental property owners, qualifying investors can be able to lower their taxable income each year; that means the government will take less out of their pocket each year. While not technically income, a penny saved is a penny earned. Something like rental property depreciation can save investors thousands of dollars over the life of a property; money that can make or break n investment.
Investment Property Analysis: 8 Factors To Consider
A thorough rental property analysis will provide insights on the potential profitability of a given deal; that is why it is crucial to know which indicators to look for and consider. Here are eight crucial factors for your next rental property cash flow analysis:
How To Calculate Rental Income?
A rental property calculator works by relying on certain variables to determine the potential performance of the investment property. For example, investors should gather as much information as they can about the property (like the purchase price and property value). Investors should also be ready to estimate a few numbers based on the information they do have, such as the vacancy rate and rental price. Read through the following list of variables to help you get started calculating rental income today:
Once you have some basic information on the rental property, you can rely on a rental property analysis calculator to estimate the profitability automatically. There is a wide array of rental property analysis software that can assist you during this process. Depending on which calculation you are trying to determine first, you can search online for different rental property calculators. This rental ROI calculator provided by SparkRental is a great place to start, as well as this annual cash flow calculator by Calculator.net.
If you do opt to act as your own rental income calculator, there are several formulas you can rely on to help. Create a rental property analysis spreadsheet using Microsoft Excel or Google Sheets—depending on what you are comfortable with—and prepare to start your calculations. Whether you choose an online rental calculator or pen and paper, be careful as you determine the above variables to ensure your deal analysis is as accurate as possible.
When To Use A Rental Calculator
A rental property calculator should be used by investors analyzing potential deals or evaluating existing rental properties. While a rental property calculator is not required for making sound investment decisions, it can provide insights to the potential or current profits of a property. Investors who employ a rental property calculator when deciding whether to invest in each property can avoid making costly mistakes. On the other hand, investors who rely on a rental property calculator to evaluate existing properties can determine if it is time to sell or reorganize.
Investment property calculators are helpful in evaluating almost any type of property, ranging from single-unit homes to multi-unit apartment buildings. These calculators are not exclusive to first-time investors either! Any investor, regardless of experience, can use the calculations to help make accurate predictions on potential rental yield and so much more. In addition, investors who are selling a property can pass on the findings from their rental property calculations to the buyer to speed up and improve the sale. Remember, the right rental property calculator can effectively guide you through both buying and selling an investment property.
What Is A Good ROI For A Rental Property?
ROI in real estate stands for “return on investment”, otherwise known as the amount of profits investors, can expect to receive from a rental property. While a good ROI will vary from investor to investor, there are some ranges that can be used as general guidelines. An ROI between five and 10 percent is reasonable for most rental properties. On the opposite end of the spectrum, an ROI of over 10 percent typically represents a great investment opportunity.
As you consider the ROI on rental property, remember to pay careful attention to each variable you consider, such as the vacancy rate, operating costs and more. Keep in mind it is better to err on the side of caution when estimating the potential ROI. By identifying accurate numbers, and leaving yourself some wiggle room, you can help ensure your estimates are as close to reality as possible.
Responsibilities Of A Rental Property Owner
Running a profitable and tenant-acclaimed property will coincide with at least a few universal responsibilities. To be perfectly clear, there are many responsibilities levied on today’s rental property owners, but the following are never left out of the equation:
It is important to note, however, that owning a rental property can be entirely passive. Enlisting the services of a genuinely great property manager can alleviate rental property owners from most responsibilities associated with leasing a property. A Third-party property manager can do just about everything for an investor, from finding and screening tenants to keeping up with maintenance requests and rent collection. In fact, it’s the services provided by third-party property managers that make rental property investing so enticing. With their help, investors may not only collect cash flow passively, but they may also increase the holdings in their portfolio without adding additional work to their schedule.
What Is The 2% Rule?
The 2% rule is essentially a justification for whether a rental property is worth investing in. More specifically, however, it is this rule that “sets the bar” for the investment. The 2% rule will tell prospective investors if a property’s cash flow potential warrants its impending acquisition costs. As its name suggests, investors want to see the investment to generate at least 2.0% of the asset’s purchase price each month in cash flow.
7 Cash Flow Equations For The Passive Income Investor
To calculate cash flow for a given property, there are several formulas investors will want to be familiar with. While these calculations may seem overwhelming at first, understanding how to calculate rental income and more is crucial for any deal analysis. Here are seven cash flow equations investors can use when evaluating a property:
Net Operating Income
Net operating income is the amount of income generated, after operating costs have been considered. The formula is simple: take the generated income and subtract the total operating costs. Remember to take time to accurately assess the expected operating costs, which include anything it takes to maintain regular operations. This will help provide a better idea of the potential profitability of a given deal.
Cash On Cash Returns
Cash on cash returns help contextualize the overall potential of an investment by taking the annual cash flow and dividing it by the total cash investment. Essentially, this formula looks at the profits generated in one year in relation to the total loan payments made during that same year. Calculating cash on cash returns are helpful when looking at the return on investment of a given property.
Return On Investment
The return on investment, or ROI, is one of the most common terms used in real estate. ROI shows the expected profits of a given deal as a percentage and is relatively simple to calculate. This makes it an easy point of reference for investors analyzing deals. To calculate the ROI of a property, take the estimate annual rate of return, divide it by the property price and then convert into a percentage. Rental properties are known to yield anywhere from five to 10 percent, with some investments even going above ten.
Rental yield is the gross rental income a property generates in relation to the investment’s total purchase price. It can be determined by dividing the annual rental income by the total purchase price and is always converted to a percentage. The rental yield can help determine the long-term viability of a given investment. For example, if the rental yield is negative or even then the investment will either cause investors to lose money or break even. A good rule of thumb for rental yield is to look for properties at or above seven percent.
Internal Rate Of Return
This is where many investors get lost, so just remember there are resources online that can help with this calculation. The internal rate of return (IRR) is used to determine the value of an investment during the time of ownership. It is yet another method used to decide whether an investment is desirable. The formula requires several variables including the purchase price, cash flow of the current period, length of current period, and the net present value. In most cases, a higher IRR signals the potential for greater cash flow from an investment.
The cap rate of a property is used to calculate the expected returns of an investment. While it is most used in commercial real estate, residential investors may find it useful as well particularly when evaluating risk. A high cap rate typically correlates with a higher level or risk, while a low cap rate can signify lower levels. To determine the capitalization rate, investors need to divide the net operating income by the total property price. The final value will be expressed as a percentage.
Cash flow is the amount of money an investment generates each month through rent, after the expenses of the property are taken into consideration. The formula is a relatively easy one to get down: simply subtract the operation costs and mortgage payment from the total rental income value. Most investors look at this metric monthly, so consider that as you determine your income and expenses. The higher the estimated cash flow, the more an investor stands to make from a given property.
No matter where you are in your career as a real estate investor, the right rental property calculator can help guide your investment decisions. If you are evaluating an existing property, place an emphasis on finding accurate numbers. By calculating your property’s performance, you can determine how to move forward. When used correctly, a reliable rental property calculator can enable investors to choose profitable real estate deals and—in turn—boost their portfolios.