Rental Property Calculator
Rental property investment refers to real estate investment that involves real estate and its purchase, followed by the holding, leasing, and selling of it. Contrary to popular belief, rental property investment is not passive income, especially if there is no management consultant hired to handle administrative work, a service that usually costs about 10% of income. People with real experience in the field often tout it as exhaustive work, whether standing by for another problem to arise, filing paperwork, or dealing with terrible tenants.
Quick Tip: Performing background checks on prospective tenants can give the lessor a better idea of what to expect about a tenant, how the tenant may treat the property, and how likely the tenant may be to consistently pay rent.
Commonly done for better returns, investors purchase cheap and inferior properties, such as foreclosures, then improve them before the leasing stage. For older properties, assume higher maintenance and repair costs. Rental property investments are generally capital-intensive and cashflow dependent with low levels of liquidity. However, compared with equity markets, rental property investments are normally more stable, have tax benefits, and is more likely to hedge against inflation.
That’s not to say that rental properties aren’t worth the effort nor unprofitable. Given proper financial analysis in the decision making, they can turn out to be profitable and worthwhile investments. The Rental Property Calculator can help run the numbers.
Real estate investing can be complex, but there are some general principles that are useful as quick starting points when analyzing investments. However, every market is different. It is very possible that these guidelines will not work for certain situations. It is extremely important that they be treated as such, not as replacements for hard financial analysis nor advice from real estate professionals, things that should always get the nod over overgeneralized guidelines.
50% Rule – A rental property’s sum of operating expenses hover around 50% of income. Remember that operating expenses do not include mortgage principal nor interest. The other 50% can be used to pay monthly mortgage payment. With this, quickly estimate the cash flow and profit of an investment.
1% Rule – The gross monthly rent income should be 1% or more of the property purchase price, after repairs. It is not uncommon to hear it proclaimed as the 2% Rule, but obviously, the higher the better.
A lesser known rule is the 70% Rule. This is a rule for purchasing and flipping distressed real estate for a profit, which states that purchase price should be less than 70% of after-repair value (ARV) minus repair costs (rehab).
Internal Rate of Return
Internal rate of return (IRR) or annualized total return is an annual rate earned on each dollar invested for the period it is invested. It is generally used by most if not all investors as a way to compare different investments. The higher the IRR, the more desirable it is to make the investment.
If there is one figure that is most important in acknowledging the profitability or relative success of any rental property to any other investment, it is the IRR. Capitalization rate is too basic in its computation and Cash Flow Return on Investment (CFROI) does not account for the time value of money.
Capitalization rate, often called the cap rate, is the ratio of net operating income (NOI) to the investment asset value or current market value.