An investor needs a reliable income calculator to make accurate projections of his or her earnings in real estate investing.
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An income calculator is a tool often used by real estate professionals and investors to determine what their returns on potential or existing investments are. Several real estate websites have their own versions of an income calculator, but we recommend Mashvisor’s investment property calculator over all the others.
In this article, we will talk about different types of real estate income sources, their costs, and how to calculate annual income and return on investment using Mashvisor’s calculator.
7 Different Types of Income Sources for Real Estate Investors
In real estate, investors have several ways of earning income. Although each opportunity offers different levels of income, they all help generate a decent gross monthly income for the investor. Some are more expensive to get into than others. Some are riskier. And then some are more rewarding. Either way, these different investment vehicles give individuals a chance of building equity and creating wealth.
1. Rental Properties
Perhaps the most popular investment method in real estate is the acquisition of rental properties.
Rental properties help not just the individual investor but other regular folks, too, as it is a good way of providing shelter to those who cannot afford to buy any property. In a way, it helps address America’s housing needs by allowing investors to rent out their properties at affordable monthly rates.
The great thing about rental properties is that their cash flow is easier to predict with greater accuracy. As a landlord, you know how much you’re paying for and what to expect monthly from your tenants, which makes computing gross annual income easier.
2. Vacation Rentals
A vacation rental is a type of rental property intended to be occupied by a tenant for shorter periods. These properties are often ones that get listed on home-sharing websites like Airbnb, VRBO, and Vacasa.
Like traditional rental properties, an investor has greater control over the investment as they get to choose the property, screen tenants, determine nightly rates, and implement management practices.
Perhaps one of the best advantages short-term rentals have over long-term rentals is their potential to earn twice as much in the right market. Let’s take a look at Mashvisor’s latest 2022 real estate market data for the top five states that have the highest average Airbnb monthly rental income and compare it to how much they make with traditional rental properties:
- Monthly Airbnb Rental Income: $5,418
- Airbnb Cash on Cash Return: 4.67%
- Airbnb Cap Rate: 4.75%
- Monthly Traditional Rental Income: $2,348
- Traditional Cash on Cash Return: 1.95%
- Traditional Cap Rate: 1.98%
- Monthly Airbnb Rental Income: $5,169
- Airbnb Cash on Cash Return: 3.18%
- Airbnb Cap Rate: 3.23%
- Monthly Traditional Rental Income: $3,292
- Traditional Cash on Cash Return: 1.68%
- Traditional Cap Rate: 1.71%
- Monthly Airbnb Rental Income: $4,349
- Airbnb Cash on Cash Return: 3.49%
- Airbnb Cap Rate: 3.57%
- Monthly Traditional Rental Income: $1,803
- Traditional Cash on Cash Return: 1.16%
- Traditional Cap Rate: 1.19%
- Monthly Airbnb Rental Income: $4,282
- Airbnb Cash on Cash Return: 4.04%
- Airbnb Cap Rate: 4.11%
- Monthly Traditional Rental Income: $1,698
- Traditional Cash on Cash Return: 0.97%
- Traditional Cap Rate: 1.00%
- Monthly Airbnb Rental Income: $4,270
- Airbnb Cash on Cash Return: 1.18%
- Airbnb Cap Rate: 1.20%
- Monthly Traditional Rental Income: $3,544
- Traditional Cash on Cash Return: 1.27%
- Traditional Cap Rate: 1.29%
Four out of these five states show that vacation rentals have great potential of earning more for an investor compared to renting out a house long-term.
3. House Hacking
House hacking is like a cousin to rental properties. This is especially helpful for those who want to get in on the real estate investment game but don’t have access to capital at the moment.
House hacking is simply renting out a portion of your property while living under the same roof as your tenants. Some who have single-family homes rent out rooms and basements to tenants while cohabitating in the same space. Others rent out the entire house and just live in a mobile home parked on the property. Folks who have money buy multi-family houses, like a townhouse complex or duplex for sale, and live in one unit while renting out the others. This way, the income from the tenants pays for the mortgage and utilities while the property owner gets to live there for free.
4. Real Estate Investment Trusts or REITs
The easiest way an aspiring investor can get into real estate investing is through real estate investment trusts or REITs. Investing in REITs is simply investing in a company that owns, manages, and finances income-generating real estate like office spaces, warehouses, and apartment units.
There are two types of REITs: Equity REITs and mortgage REITs. The former invests directly in real properties while the latter lends money secured by the trust to investors.
5. Real Estate Crowdfunding
Another indirect way of investing in real estate is the relatively new real estate crowdfunding method.
It is what the name implies. Several investors pool their money to fund bigger real estate investments and projects and in turn, share in the benefits and rewards of their investments accordingly. It is a great way for investors to diversify their portfolios and for beginner investors to get into real estate, especially for those with very little money to invest.
6. House Flipping
Flipping houses is another great way to earn a decent income in real estate. House flipping involves looking for undervalued distressed properties and rehabilitating them to sell at a profit. A lot of investors have made a livelihood with fix-and-flips. However, it requires plenty of hard work and money to do.
By using a net income calculator, you can get a good approximation of how much you can earn through this investment method. While the computation is a bit different from rental properties and other passive income investments, the fundamentals are pretty much the same. As long as you know your purchase price, closing costs, rehabilitation costs, and financing method, you can get a good picture of what to expect.
For instance, let’s say you buy a property worth $100,000 and spend $40,000 on repairs and updates. Additionally, you spend about $25,000 on closing and carrying costs. You then decide to sell it at a nice round figure of $200,000. Based on the given numbers, you earn a handsome profit of $35,000 on a $165,000 all-cash investment.
Now let’s say you had some help with the capital and only produced $20,000 for the down payment and financed 80% of the purchase along with 100% of all the rehabilitation, closing, and carrying costs. Even if we add $5,000 more for fees and interests, you would still have a $30,000 profit from your total cash investment of $50,000. That’s already a whopping 60% cash on cash return rate! However, considering the amount of time and effort you need to put into a fix-and-flip project, the return on investment might not be as attractive as it seems.
Wholesaling is similar to house flipping with the only difference being it doesn’t require any form of rehabilitation. The goal of a wholesaler is to purchase a distressed property from a motivated seller, get a contract assigned to the subject property, look for a potential buyer (usually real estate investors), and assign the contract to the buyer.
A typical wholesale transaction gets closed in a short period of time, from a few days to several weeks. Since no home improvements are involved, the profit margin for wholesaling isn’t as large as house flipping. But it’s still a good way to earn extra income in a short time.
11 Common Types of Costs in Real Estate Property Investments
Investing in real estate will take a toll on your wallet in more ways than one. If you think all you need is the initial investment, you’ve got another thing coming.
Here are the most common costs and expenses associated with real estate investing:
Your initial investment mostly involves one-time payouts that you need to make to acquire and set up your property.
Property Purchase Price
The bulk of the initial investment will go to the purchase of the property. This may or may not include appliances and furniture.
Closing costs typically go between 3% and 6% of the property price. So if you buy a $100,000 property, your closing costs will fall somewhere between $3,000 and $6,000. Several factors may affect closing costs such as location, mortgage lender, and loan type.
If you’re in the fix-and-flip business, then you should consider home repair costs as a part of your initial investment. The amount will depend on the overall condition of your home and the repairs needed to make it as profitable as you would want it to be.
If you’re investing in rental properties, expect to shell out money regularly to keep your rental business running.
Upkeep is one of the things that will eat up a lot of your monthly operational budget. Proper maintenance is needed to ensure that the house is in good condition and suitable for habitation.
Utilities such as electricity, internet, heating, water, basic cable, and other similar things needed to keep your rental business operational need to be paid monthly. But if you are running a traditional rental business, your tenants may have to pay for these instead.
If you did not pay for your income property in cash and opted to have it financed, you also need to set aside a monthly budget for mortgage payments.
A responsible and smart investor will always purchase insurance for the property as well as liability insurance. Landlords generally also ask tenants to get insurance to mitigate the financial risks.
In the US, sellers usually pay commissions of about 6% of the property purchase price to all agents and brokers involved. Buyers don’t have the burden of paying commissions to anyone. However, if the buyer decides to rent out their properties, they may need to pay broker’s fees if they availed their services in finding a tenant.
You will also have to account for certain expenses, particularly when filing your taxes:
In the US, the government allows investors to deduct the amortization of the closing costs’ financing over the loan’s term. This non-cash expense can be taken from the rental income.
The US government also allows investment property owners to depreciate a property’s purchase price as well as costs not related to financing for a period of 27.5 years. This non-cash expense can also be deducted from the rental income.
Every real estate investor should dutifully pay any taxes associated with their real estate investment. We will talk about this in the next section.
Real Estate Investors’ Tax Obligations
As mentioned above, real estate investors should pay their taxes regardless of what their chosen investment vehicles are. It is every American’s responsibility to make sure their taxes are filed, reported correctly, and paid on time.
This is where an after tax income calculator will come in handy. You can simply use a yearly income calculator and deduct the amount of tax payment you need to make to come up with your actual total annual income.
The following are the most common taxes associated with real estate investments:
A property tax is a tax paid on the assessed value of a property. The amount of property taxes you’ll need to pay varies depending on the property’s location.
Net Investment Income Tax or NIIT
Depending on the type of investment vehicle you choose, you might need to also pay for NIIT. This is a tax that is charged on an investor’s investment income (interest and dividends). The IRS has outlined on its website who are subject to NIITs.
Real Estate Income Tax
If you decide to rent out your investment property, you are subject to paying real estate income tax as it is considered regular income. Just make sure to check if your rental business falls under the IRS’s definition of passive income, otherwise, you will risk filing incorrectly, which will be subject to penalties and fines.
Business Income Tax
Certain rental businesses fall under the business income tax category if the property owners and hosts go beyond just providing the basics of a rental business. For instance, if you’re a rental property owner and you offer bed-and-breakfast services to your guests and tenants, then you are likely to fall under this taxation category.
Capital gains taxes are taxes investors have to pay from any profit made from selling a real estate investment.
Individual Income Tax
This type of tax is levied on dividends, interests, and any other investment-related earnings you make. This applies to real estate investors who don’t own any actual real estate property.
How to Compute One’s Real Estate Investment Income
Now that we’ve discussed the different ways of earning in real estate as well as the expenses that go with it, let’s take a look at how to calculate net income using Mashvisor’s income calculator.
Before anything else, you will need to find out what your gross annual income is using a gross income calculator or an annual income calculator. To determine how much you are making annually pre-tax, all you need to do is add up all of your monthly earnings and subtract the costs and expenses incurred throughout the year. Your gross real estate income in this case will include any income made on any real estate investment.
Once you have your gross annual income, you can then deduct all of the costs and expenses (both one-time and recurring) to come up with your net income.
What’s the Formula for Net Income?
Net Income Formula = Gross Annual Income – Total Annual Costs and Expenses (including taxes)
From there, you can now make an accurate projection of how much you can potentially earn in a month or year. Of course, crunching numbers will be a lot easier if you have a reliable monthly income calculator by your side.
Mashvisor’s investment calculator is considered one of the best online today. It is an intelligent tool that incorporates different variables to give its users highly accurate and reliable results. It factors in values like the amount of cash invested, total annual investment, appreciation rate, depreciation, and interest among others. All of these things will help you get to a more approximate projection of your potential annual income.
Next, the website’s investment property calculator also ensures users a smaller range of errors, which leads to nearly perfect numbers. This increases not just user confidence but investor confidence as well. Not only does it give them precise computations but it does so in a fraction of the time compared to doing things manually, no matter how good they are at math.
Lastly, Mashvisor’s income calculator leads users to the right investment properties in locations that are perfect for your investment goals and criteria. Remember that each location has something different to offer investors. One investor might find success in a location where another has experienced several challenges. It will greatly depend on the investor’s vision and direction. Mashvisor’s calculator increases one’s chance of investment success by helping users and investors find the right properties in the right real estate markets.
Wrapping It Up
Having a yearly income calculator that allows you to make accurate projections for investment profits is a big help in making the right investment decisions. And while there are several great income calculators online, only a select few can truly meet investors’ expectations and deliver near-perfect results. Mashvisor’s investment calculator is one of the few that has gained the trust and confidence of thousands of investors in the US.
To get access to our real estate investment tools, click here to sign up for a 7-day free trial of Mashvisor today, followed by 15% off for life.