Knowing how to calculate rental income can make the difference between owning a successful investment property or a mismanaged financial burden. Any investor needs to use the best rental income calculator to ensure success in their real estate investing journey. Profitability remains the primary motivation of all investors.
One of the key real estate basics is rental income. Understanding how to calculate a property’s rental income and manage it is essential. Yes, technology’s made it easy for investors to calculate rental property return on investment with digital calculators. With a rental income calculator, investors no longer need to spend countless hours entering data into spreadsheets and performing complicated investment property analysis.
However, it’s important for real estate investors to know what the numbers mean and where they’re coming from. It is especially true for a beginner real estate investor. You can do it by understanding the calculations behind the important numbers you always see thrown around when people talk about real estate (rental income, cash flow, etc.).
So before you make any investments, take a couple of minutes to read about income. Here’s how to calculate rental income.
How to Calculate Rental Income: The Basics
Many people start real estate investing because they’ve heard all about how rental properties are the number one wealth-builders. And it’s true, they are. However, in order to find the best rental property in the market, you need to brush up on a couple of things first.
Real estate investors are always looking for high return on investment (ROI) properties. Rental income is a big factor in determining the expected return of an investment. You need to calculate rental income to be able to calculate rental property cash flow and ROI.
What Is Rental income?
To put it simply, rental income is the rent payments you receive from your tenants. Depending on the lease agreement and the type of rental property (long-term or short-term), you would probably either collect rent on a monthly or weekly basis.
Typically, traditional rental units are leased for longer periods of time, and therefore, rent is paid monthly. Short-term rentals, such as Airbnb rentals, are usually only rented out for a couple of days; in such a case, you can collect rent payments per night or at the end of the guest’s stay.
It’s important to note the difference between gross rental income and net rental income. Gross rental income is what was mentioned above – the amount of money you collect in rent payments. However, net rental income is the amount of profit you make after factoring in expenses (management costs, taxes, mortgage payments, maintenance, etc.).
Rental Income Calculation
If you’re trying to calculate rental income of a potential investment, there are several ways to go about it. The simplest case is if the property is already being rented out and with a pre-determined rental rate. It is a straightforward calculation. You simply multiply the rental rate with the number of tenants and subtract expenses and vacancy rates to get your monthly rental income.
For example, an apartment building is currently housing 12 tenants. The monthly rent payment is $400. To calculate rental income, you would multiply 12 by $400 and get $4,800 as your gross rental income. Expenses (including vacancy rate) come out to be $700. Including this would give us a monthly rental income of $4,100.
How to Calculate Rental Income: The Complications
Realistically, when on the hunt for a new investment prospect, the financials aren’t as clear-cut as our first example makes them out to be. For starters, investors many times find themselves having to set the rental rate.
How to Determine Rental Rate
The most practical way to go about finding the rental rate is to look at real estate comps. They are comparable rentals to your prospective property. Setting the right rental rate can make or break the attractiveness of your property. You could find the best rental property but not succeed. Why? Well, if you set the rent too high, tenants won’t be interested. If you set one too low, you won’t be making a profit, and the investment could be a bust.
Real estate comps play a crucial role in avoiding this. By researching similar rental properties in the market and determining the local rental rate, you can set an acceptable rental rate. Note that when we say “similar rental properties,” we don’t mean exact. Because realistically, it would be near impossible to find two identical properties to compare. However, if you locate a couple of similar properties and adjust for their differences, such as occupancy rate, you can determine a suitable rental rate.
Search for investment properties here, and the analysis for each property will include the best real estate comps ready to go!
Annual Rental Income
Learning how to calculate rental income is key for one main reason: return on investment. Finding the ROI of a rental property can only be done once the annual rental income is found. So annual rental income is simply your monthly rental income multiplied by 12. Add your equity build to get your net annual income.
Now, to find your returns, you would divide the net annual income by the initial investment cost and express the results as a percentage. A rental ROI is attractive in the 4%-10% range. Of course, depending on property-specific details, you can adjust the acceptable ROI to be higher or lower.
Using a Rental Income Calculator
Using a rental income property calculator offers several benefits. First, it allows the user to avoid manually performing investment property analysis, thereby saving them a lot of time and effort in the process. Landlords and owners can instead focus on the other aspects of running their vacation rental property business, such as screening potential tenants or doing renovations and repairs.
Second, it helps eliminate mistakes in calculation. For the uninitiated, real estate calculations can become complex. Mashvisor’s predictive analytics provides accurate estimates, allowing property investors to quickly calculate the optimal rental rates to charge their tenants.
Users looking to calculate rental income tax just need to enter the property’s basic information, such as its costs and other expenses, and the calculator does everything else. With the relevant taxes factored in, it can serve as a rental income tax calculator or rental property income tax calculator. There is no need to look at other online sources to find out how to calculate rental income tax.
Lastly, the tool serves as a real estate mentor for the investor. It lets the user find the best neighborhoods to invest in and select the optimal rental strategy based on their investment goals.
Mashvisor: Finding the Best Rental Income Calculator for Your Needs
We’ve shown you how to calculate rental income the easy way. For more complex calculations, it is best to use a rental property calculator, such as the one from Mashvisor.
Mashvisor offers one of the best rental income calculators for real estate investors today. The platform uses the latest and most comprehensive data analytics to provide the most accurate income estimates for an Airbnb or traditional rental property. Its vacation rental income calculator allows investors to perform neighborhood analysis and determine the best rental strategy for each particular neighborhood.
At the property level, it calculates important metrics such as cash flow, cash on cash return, and cap rate once the user enters all the property’s basic information, such as the one-time startup costs and monthly expenses.
Mashvisor’s Mortgage Calculator
Mortgage represents one of the major costs related to purchasing and owning a property. As we always say, investors and homeowners must learn how to properly navigate the real estate market in order to make a profit and achieve their investment goals.
They need to select among the different types of mortgage loans and find the best mortgage rates. Securing the most beneficial repayment terms also goes a long way to ensuring a positive cash flow at all times. To make the most of your chosen mortgage financing method for your property, a mortgage calculator with rental income can help.
With Mashvisor’s mortgage calculator, you can find out if you’ll still make a profit (or not) after making all the necessary mortgage payments on your property. To use the tool, just enter the property’s price, down payment, and interest rate. You can also select the mortgage type (fixed-rate, interest-only, or adjustable-rate) and loan term.
Every real estate investor wants to be successful. You would want to find the most profitable locations and be able to charge the optimal rental rate for your tenants. In the end, you hope to make an acceptable rate of return from your property investment, that is, after you calculate the tax on rental income.
As an investor, you need to make sure you understand every aspect of the investing process and that you’re doing everything right. To guide you along the way, Mashvisor provides you with the best set of real estate investment tools, including a rental income calculator. Whether you prefer investing in a long-term rental or a short-term rental, you will surely find the tool useful for your specific need.
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