Would you like to know how to find out your property’s earning potential with a great investment return calculator? This article will help.
Table of Contents
- Why Should You Know Your Property’s Earning Potential?
- Why Should You Analyze Investment Properties?
- When Should You Analyze Investment Properties?
- Limitations of Analyzing Investment Properties
- 4 Steps to Know the Return on Your Investment Property
Why Should You Know Your Property’s Earning Potential?
The income potential from an investment property is at an all-time high. This means that knowing the return on investment (ROI) on any property is important. But before you buy any property, it is vital that you look at your estimated costs and expenses and also, know your rental value. This will allow you to compare the property to others in the same area.
Once you have figured out the numbers and how much you will make on the property, you can then narrow it down. If you discover that your costs and expenses are too high to make a return on investment, it’s then left to you to decide if you want to stick it out and pray that you make a profit—or don’t buy that property in the first place.
You can see that it is important to know the ROI of any investment property you are looking at. But how can you do these calculations? Simple. It’s with the use of an investment return calculator. In this article, you will discover the 4 steps used to calculate the returns on your investment property.
Why Should You Analyze Investment Properties?
When you are surveying properties you want to invest in, you may start crossing off some houses because they are too far away or the asking price is out of your budget. Nevertheless, deciding on the property to buy should not end there. Analyzing investment properties will help you make sound investing selections.
A real estate return on investment calculator provides accurate data. You can’t completely trust agents because they are out to make profits. This means that sometimes you will overpay for a property. This is why it’s important to use investment analysis tools like Mashvisor. Perform a quick Google search and you will find an online calculator that fits your needs.
Another reason why you should analyze your investment property using an investment calculator online is that you will get the actual value of the property. You will also get the buyer’s information, the future of the investment property, its vacancy rate, and the return on investment on the property. If you don’t want to end up with a losing investment, you have to do your due diligence.
When Should You Analyze Investment Properties?
The best time to analyze an investment property is right before you buy it. You don’t want to spend huge sums of money on a property and then perform an investment analysis only to find out that you have wasted your money on a property that will bleed you dry.
Before you make a down payment on that property, look for a good investment analysis tool like Mashvisor and see if that property will make you money in the future or not. If not, skip it and keep looking and keep using the investment analysis tool to find one that will make you a profit in the future.
Also, analyze your investment properties before selling them. This is important so that you can accurately place a price tag on the property. You don’t want to go too high as you will drive away buyers and you don’t want to go too low as you will lose money on the property. Analyzing the housing market in 2022 when you want to sell will provide you with the price point sweet spot that will make both you and the buyer happy.
Limitations of Analyzing Investment Properties
Although the benefits of analyzing investment properties are many, there are also some limitations. For instance, it could cost you your time and a small fortune to completely analyze an investment property to your satisfaction. You would also risk having another investor swoop in while you are still trying to analyze the property.
One other major con of analyzing investment properties is that you can get sucked into the loop of overanalyzing. You might find yourself trying to score the perfect investment property that you don’t take action for weeks. It’s okay to spend some time and find the perfect investment property for you, but you should know when to stop.
4 Steps to Know the Return on Your Investment Property
Below is a four-step guide to calculating the return on your investment property:
1. Define Your Investment Goals
Before you even start to calculate your property’s earning potential and ROI, you must first ask yourself if you are investing to flip, or if you are investing for cash flow. You might want to go for both options. But it is difficult to get both a high cash flow and high real estate appreciation.
Investment properties that have a high cash flow rate usually have a low or slow appreciation rate, and properties that have a high appreciation rate end up having a low cash flow rate. This is usually because rental prices do not rise as quickly as property values in rapidly rising economies. The ratios just do not work for a given purchase price.
2. Know the Return on Investment (ROI) Formula
ROI has a set formula and you will make better investment decisions if you know what it is and how to use it. The formula for return on investment is:
ROI = [(Annual Rental Income – Cost and Expenses) / Cost of Property] x 100
This is the most important formula to know when trying to find out your property’s earning potential. You can calculate your annual rental income by multiplying your monthly rental income by 12.
Then, subtract the costs and expenses of the property from the annual income. Finally, divide the final number you get by the cost of the property. What you eventually get is the estimated return on investment in percentage.
For instance, let’s assume you are planning to invest $300,000 in a property, which includes the purchase price, closing costs, remodeling, and furnishing. In one year, you estimate that you could charge $2,000 rent per month, earning a total of $24,000 in rental income. You expect your running expenses to amount to $800 per month or $9,600 per year. Your ROI will be calculated this way:
Return on Investment (ROI) = [(24,000 – 9,600) / 300,000] x 100
ROI = (14,400 / 300,000) x 100
ROI = 0.048 x 100
Thus, the ROI is 4.8%.
There are a few things you need to know about before you can calculate the ROI on a potential investment property. You should estimate its market value, cost of repair, and other costs you need to pay upfront. You also need to know the mortgage details, estimated rental income, and recurring expenses.
Knowing these details lets you conclusively know whether the property is worth investing in or not.
3. Understand Your Metrics
Below are the metrics you must be familiar with before you are able to calculate the ROI of your investment property.
Cash flow is the total amount of money left over from an investment property after paying all operational expenditures and putting money away for potential future maintenance. The formula for cash flow is:
Cash Flow = Gross Income – Expenses
This is basically how much cash you have left from your rental property after you have paid off all your expenses.
Cash on Cash Return
The cash on cash return shows the estimated return on investment in the rental property. To get this figure, divide the after-tax yearly cash flow by the acquisition price of the property as shown in the cash on cash return formula below:
Cash on Cash Return = Yearly Cash Flow / Price of the Property
The cash on cash return is a great indicator of how well or how poorly a potential investment property will perform.
Net Operating Income (NOI)
The net operating income (NOI) is a calculation that shows the profitability of your investment property. It is computed by deducting your investment property’s operational expenditures from your gross income. The formula is shown below:
NOI = Gross Income – Vacancy Losses and Operating Expenses
The capitalization rate, often known as the cap rate, is the expected return on a rental property. It is identical to a cash-on-cash return in the sense that it does not account for borrowing charges and considers the purchase price rather than the amount of money initially spent.
To calculate the cap rate of your property, multiply the net operating income of the rental property by 12 and then divide the result by the purchase price of the rental property:
Cap Rate = (NOI x 12 months) / Price of the Rental Property
The cap rate is measured in percentage.
Internal Rate of Return (IRR)
The internal rate of return (IRR), is the return on an investment over a given period. It is the net cash flow and predicted appreciation of a property divided by the intended hold duration.
This investment rate of return calculator is a useful approach to assessing the performance of your investment property over the period you want to retain it. But it isn’t the first statistic you should consider when analyzing rental properties because it is strongly reliant on anticipating years of cash flow and a predicted selling price.
Predicting prices years ahead is not the most dependable because we can’t see the future.
Annual Gross Rent Multiplier (GRM)
The annual gross rent multiplier (GRM) is used to calculate the value of a rental property. It can, for example, assist you in determining whether the valuation is fair. The GRM is calculated by dividing the entire selling price by the total yearly rent.
GRM = Selling Price / Total Yearly Rent
This means an increase in the value of a rental property over a given period. This is every investor’s dream. There are many reasons why a property will appreciate, and some of them are inflation, improved job prospects, and growth in your area.
Consider how advantageous this is for both new and experienced investors. This rise in property value or monthly rent might be viewed as a profit when selling your house.
If you are buying rental property with financing, you have to understand the role compound interest plays in your return on investment. Compound interest can have a major effect on your return. The compound interest formula is:
Compound Interest = P [(1 + i)n – 1]
- P = Principal
- i = Interest rate
- n = Time period
4. Use an Investment Return Calculator
An investment return calculator is a tool that allows you to estimate your profit or loss from your investment rental property. It is also used to know the performance of various investments.
You can find a return on investment calculator on Mashvisor. You can use it to accurately tell whether you should invest in a rental property or not. Mashvisor’s annual return on investment calculator cannot be surpassed.
Using a return investment calculator will help you determine the profit or loss on a property. Calculating the exact earning potential of your property may be difficult based on all the costs and income involved. That’s why you should use a good investment calculator like what you can find on Mashvisor because the rate of return on investment calculators cannot be overemphasized.
Mashvisor has a great investment return calculator that helps you accurately determine the earning potential of your investment property. All you have to do is input the necessary numbers into the calculator and it will bring out the earning potential of your property. This tool can make the process of figuring out your property’s earning potential a lot easier and faster.
Mashvisor’s technology helps both beginners and experienced real estate investors with extensive data and analysis as to where they should invest.