Buying a rental property is easily the best investment you can make. While that is common knowledge, the ways of determining what makes a property lucrative are not. So, how can you quickly evaluate a rental property? You can do so using 5 of the most important property metrics:
- Rental income
- Cash flow
- Cap rate
- Cash on cash return
- Airbnb occupancy rate
The ONLY Thing You Need to Calculate Rental Property Metrics
Another question, however, quickly arises. How can you compute these 5 rental property metrics? With Mashvisor’s array of real estate investment tools, you can calculate these metrics in a matter of minutes! Mashvisor uses the most up-to-date data to project predictive trends for a rental property search. Its tools also require user input, such as financing costs, to provide the most accurate results for a selected investment property for sale. As a result, all real estate investors (beginner and experienced) can use Mashvisor for a reliable market and investment property analysis for traditional and Airbnb rental properties.
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1. Rental Income
One of the most important metrics you’ll need when buying rental property is rental income. It’s an essential building block. Simply put, rental income (or gross rental income) is the rent payments received from tenants. This income can be received on a monthly basis, as is common for traditional rentals, or a nightly basis, typical for Airbnb vacation rentals. While relatively simple, rental income is fundamental when calculating other key metrics for investment property analysis.
Like the other 4 property metrics, calculating rental income without the proper tools is a massive headache. For starters, estimating rental income heavily depends on real estate comps. Rental comps are properties that are similar in fair market value and location to yours. Through comparisons and addition of data, a property’s rental income is then deduced. Luckily, Mashvisor’s rental property calculator already does this for investors. Every rental property for sale on the platform is accompanied by a pre-calculated rental income estimate. The calculator also provides a list of real estate comps if investors are interested in the calculation. By using Mashvisor, you can find out the estimated rental income of any traditional or Airbnb property in a housing market.
2. Cash Flow
From rental income, we move on to cash flow. Gross rental income tells real estate investors how much they are earning. However, it doesn’t take rental expenses into account. That’s exactly what real estate cash flow does:
Cash Flow = Rental Income – Rental Expenses
As the difference between rental income and expenses, cash flow can be calculated on a weekly, monthly, or yearly basis. Positive cash flow is the goal of every investor. It represents a positive difference when income exceeds expenses. A negative cash flow, on the other hand, is a net loss, with expenses exceeding income.
Calculating cash flow is easier said than done. Since rental income is generally unknown to buyers, they can’t properly estimate cash flow. Mashvisor, once again, is here to help. In addition to showing you what the expected rental income is, Mashvisor’s cash flow calculator also provides expense estimates. The calculator is interactive as well, allowing real estate investors to insert and adjust rental expenses. As a result, users will be provided with accurate cash flow estimations for rental property.
3. Cap Rate
Rental income and cash flow are undoubtedly helpful property metrics. However, they do not measure profitability as it compares to a property’s value. The next metric, cap rate, is one of the metrics that does just that.
Cap Rate = (Net Operating Income ÷ Fair Market Value) × 100%
Short for capitalization rate, cap rate determines profitability regardless of the financing method. In other words, cap rate computes profitability assuming the investment property is fully purchased with cash. This makes the metric valuable for quick comparisons.
Cap rate depends on two variables, as seen in the cap rate formula above. The first, net operating income (NOI), is annual cash flow. FMV, or fair market value, is the current market value of a property.
As seen, calculating cap rate is more complicated than the previous property metrics. For Mashvisor’s calculator, however, it’s nothing more than a walk in the park. The calculator directly provides traditional and Airbnb cap rate data for all its properties.
4. Cash on Cash Return
Cash on cash return is one of the most useful property metrics for investors. In many ways, cash on cash return is similar to cap rate. The overall difference, however, is that cash on cash return includes financing costs into its calculation.
Cash on Cash Return = (Annual Pre-Tax Cash Flow ÷ Total Cash Invested) × 100%
To demonstrate the differences, let’s analyze cash on cash return’s two variables. Annual pre-tax cash flow is simply the difference between net operating income and debt service, which is the amount used to cover the principal and interest on a mortgage. Since cap rate does not consider financing costs, it’s debt service is essentially zero. This makes the numerator, net operating income, the same for both property metrics when you buy a rental property with cash.
A similar situation arises with the denominator of both metrics. If a property is purchased fully with cash, its total cash invested equals its fair market value. Just as cap rate estimates profitability relative to FMV, cash on cash return does the same with the amount of cash invested. This makes cash on cash return a reliable metric for on-going rental property analysis.
Calculating cash on cash return is arguably the most difficult of the best property metrics. There are many financing costs that investors must consider. These include:
- Property price
- One-time startup costs (home inspection, closing costs, repair costs)
- Mortgage payments
- Property tax, property insurance, property management
With Mashvisor’s rental property calculator, we provide the most accurate estimates for all of these costs. You can also adjust these costs to see how they affect the rental ratios and the rate of return on a rental property. Any changes made will be automatically reflected in the pre-calculated cash on cash return value.
5. Airbnb Occupancy Rate
The last, but not least, of the 5 best real estate ratios is Airbnb occupancy rate. The Airbnb occupancy rate is the ratio of time a rental property is occupied to the time it is available for rent.
Airbnb Occupancy Rate = Booked Nights ÷ Total Available Nights
Airbnb occupancy rate depends on multiple quantitative and qualitative factors. Examples include location, seasonal trends, and available nights. Mashvisor’s calculator uses all of these factors and more when calculating Airbnb occupancy rate. More specifically, Mashvisor uses the average occupancy of the last 12 months for Airbnb rental listings and includes that in an Airbnb property analysis. And all of Mashvisor’s Airbnb data is verified using figures from real Airbnb hosts. As a result, you’ll be sure to find the best and busiest Airbnb properties for sale through Mashvisor.