One of the key real estate basics is rental income. Understanding how to calculate it and manage it is essential. Yes, today’s technology has made it easy for investors to calculate rental property return on investment with digital calculators. However, it’s important for real estate investors to know what these numbers mean, and where they’re coming from. This is especially true for a beginner real estate investor. You can do this by understanding the calculations behind the important numbers you always see thrown around when people talk 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 this 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, mortgage payments, maintenance, etc.). This figure would be a better representation of the actual cash flow of your rental property.
Rental Income Calculation
If you’re trying to calculate rental income of a potential investment, there are multiple ways to go about it. The simplest case is if the property is already being rented out and has a pre-determined rental rate. This is a straight-forward 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 this is to look at real estate comps. These 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 adjusting 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.
Rental Income Calculator
This is how to calculate rental income the easy way. One of the best real estate investment tools is a rental property calculator. This tool includes the rental income calculator, as well as a calculator for other important ROI metrics (cash on cash return, cap rate, cash flow, and so on). You simply enter the property’s basic information, such as its cost and other expenses, and the calculator does everything else. It can even show you real estate comps!
Where can you find this tool to calculate rental income quickly and easily? Mashvisor provides real estate investors with the best set of real estate investment tools. To start your 14-day free trial with Mashvisor and subscribe to our services with a 20% discount after, click here.