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:
1.
Location: You can change a lot about a
property, but you cannot move it to another neighborhood. The location of a
rental property will influence its desirability and your ability to keep
vacancy rates low. Pay attention to market factors when deciding on an area,
and do not be afraid to shop around.
2.
Income
And Cash Flow: Income
refers to the amount of rental income generated, while cash flow represents the
net amount of cash being transferred into and out of a property. These
indicators can help investors determine whether a property will be profitable.
3.
Property
Type: Property type
refers to the number of units and type of house you are looking at. Examples
include single-family homes, multi-family homes, duplexes, apartments,
townhouses, condos, and more. Each type of property will come with unique
advantages and disadvantages, so be sure to weigh the pros and cons of each
property in your area.
4.
Ideal
Tenants: Tenants are where
most of your income is generated when investing in rental properties, which is
why the right tenants are crucial to your success as a real estate investor.
Meet with the current owners of a property and ask if they have any problems
with the existing tenants. It will also benefit you to tailor your marketing
techniques and prepare appropriate rental applications to attract reliable
tenants.
5.
Vacancy
Rates: Vacancy rates are
determined by looking at what portion of the year a property does not have
tenants. A perfect vacancy rate would be zero percent, meaning the property is
generating rental income through the entire year. While it is not impossible to
have a nonexistent vacancy rate, factor in the possibility of vacancies when
calculating possible rental expenses.
6.
Rental
Strategy: Decide whether
you are focusing on short- or long-term rental properties, which will influence
the types of homes and areas you should invest in. A long-term rental property
is a more traditional rental property involving leases, and long-term tenants.
Short-term rentals are typically thought of as vacation homes or Airbnb
rentals. Both can yield attractive results, depending on your target real
estate market.
7.
Operating
Expenditures: Operating
expenditures are any ongoing costs of running a rental property. They include
maintenance costs, equipment, insurance, utilities, and any other operational
costs. To determine operating expenditures, add up maintenance costs, property
management fees and and other costs of running the property.
8.
Capital
Expenditures: Capital
expenditures refer to issues that need to be taken care of periodically, but
not as frequently as operating costs. Physical assets such as property, industrial
buildings, or equipment could be counted as capital expenditures. To better
understand the differences between capital and operating expenditures, check
out this in-depth 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:
·
Current
Property Value: The
current property value is how much the property in question is currently worth.
Investors should not take the purchase price at face value and should instead
hire a professional appraiser to complete a report. The property value will
help you determine a number of calculations and can even help with your
purchase negotiations.
·
Total
Cash Investment: This
refers to the amount of cash investors put towards the property, including the
down payment and any renovation costs. Investors who purchase a property in all
cash could therefore include the entire purchase price.
·
Closing
Costs: Lender, notary
and attorney fees are all included in the total closing costs. These also refer
to costs incurred during the title search, property transfer and loan
origination. Closing costs typically range from two to five percent of the
total purchase price.
·
Mortgage
Rate: A mortgage rate
is simply the interest rate for the loan used to finance the property. If you
have not yet purchased the property, this information should still be available
by consulting your lender with the necessary information.
·
Loan
Term: Loan term refers
to the length of a given loan. On average a rental property loan term could
range from 10 to 25 years. The loan term will help when calculating operating
costs and more.
·
Rental
Yield: Rental yield is
the anticipated monthly rent from an investment property. Include any income
generated from monthly rent payments, parking permits, laundry services, or
other cash flow from the property. If you are unsure of the current rental
yield (per the seller) use market research to help, make an accurate estimate
for the property.
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:
·
Property
Maintenance: Rental property
owners are responsible for keeping the property in living condition. That means
they will need to contact the appropriate businesses to keep up with
maintenance, repairs, renovations, and anything else.
·
Filling
Vacancies: The worst thing
that can happen to a rental property owner is a vacancy. Therefore, finding
tenants is one of the biggest responsibilities of an investor.
·
Paperwork: Administrative paperwork is
tedious, but it must be done. Everything from filing taxes to signing leases
needs to not only be done but done accurately.
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:
1.
Net
Operating Income
2.
Cash
On Cash Returns
3.
Return
On Investment
4.
Rental
Yield
5.
Internal
Rate Of Return
6.
Capitalization
Rate
7.
Cash
Flow
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
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.
Capitalization
Rate
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
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.
Summary
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.
Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC
Hard Money Lender
Hard Money Loans
Hard Money Loan
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com
Dennis Dahlberg Broker/RI/CEO
NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave | Austin | Texas | 78701
About: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.
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