Buying a rental property can be a smart investment, but it’s important to run the numbers to determine if it will generate a positive return. There are a few key calculations to assess the profitability of rental investments. First, estimate the monthly rent you can charge and expected vacancy rate to determine your gross rental income. Then calculate expenses like mortgage, taxes, insurance, maintenance and property management fees. Subtracting expenses from gross income gives you net operating income. Compare this cash flow to your total investment to analyze return metrics like cap rate and cash on cash return. Running these rent calculator analyses helps you objectively evaluate if a rental property will be a worthwhile investment.
Analyze gross potential rental income to estimate profit
The starting point is determining the fair market rent you can charge based on comparable properties and location. Online listing sites like Zillow can provide rent estimates for your area. Remember to factor in average vacancy rates, usually around 5-10%. If the unit will be vacant 1 month per year on average at $1,000 rent, deduct $1,000 from your annual potential rent. Gross rental income is your projected annual earnings if the property was always 100% occupied. This rental income number is critical for assessing if you can generate enough revenue to profit from the property after expenses.
Calculate expenses to determine net cash flow from rents
While rent provides income, you also have to account for the costs involved in running the rental property. First is your mortgage payment, including principal, interest, taxes and insurance (PITI). If you pay 20% down on a $200,000 property with a 30-year loan at 5% interest, your monthly PITI is around $1,075. Annual property taxes vary but often range from 1-3% of home value. You’ll need property insurance to protect against damage, usually 0.3-1% of value. Budget for ongoing maintenance and repairs of 1-2% of home value. With a $200,000 rental, that’s $2,000-4,000 per year. Finally, factor in 8-12% of rent for a property manager. Add up all these expenses and subtract from your gross rental income to get your net operating income.
Leverage return metrics like cap rate to evaluate profit potential
With your income and expenses projected, you can determine key rental property return metrics. A common metric is cap rate, calculated by dividing annual net operating income by property value. If your $200,000 rental produces $12,000 in net income after all expenses, the cap rate is 12,000/200,000 = 6%. A higher cap rate means more return for your investment. Compare to average cap rates in your area to assess if the deal is a good value. Cash on cash return measures annual pre-tax cash flow compared to your initial investment. If your $40,000 down payment nets $12,000 per year, your cash on cash return is $12,000/$40,000 = 30%. The 1% rule is another guideline requiring monthly rent to be at least 1% of purchase price. These metrics help assess if the returns justify the risks of rental investing.
Use an investment property calculator to crunch the numbers
If this seems complicated, free rental property calculators simplify the process. You plug in purchase price, expected rent, tax and insurance rates, maintenance costs, and other details. The calculator automatically runs through the math to provide your key cash flow, cap rate, cash on cash return and other metrics. Experimenting with different assumptions for things like rent and vacancy rates provides a clearer picture of potential risks and returns. Doing this analysis on the front end prevents making a poor investment. A positive outcome from the rent calculator indicates the property could provide healthy returns and consistent passive income.
Running rental property return calculations with a rent calculator helps investors objectively evaluate potential deals. Estimating income and expenses, analyzing metrics like cap rate, and modeling different scenarios prevents making an investment that loses money instead of generating positive passive cash flow.