There has been a real estate ROI calculator-Excel spreadsheet debate about which is better. We’re here to get to the bottom of it all.
Table of Contents
- The Ongoing Real Estate ROI Calculator-Excel Template Debate
- How to Create a Real Estate ROI Calculator Using Excel
- Is Using an Online Real Estate ROI Calculator More Efficient?
Regarding real estate investing tools, investors are somewhat divided between a real estate ROI calculator and an Excel spreadsheet. To its credit, many users prefer Excel to organize their administrative and tabulation work.
However, when it comes to real estate investing, you need to give it a second thought. You might be better off using an investment property calculator instead. We’ll explain why in the succeeding sections.
We will explore the differences between the two systems and show you why an ROI calculator like Mashvisor’s investment property calculator is more efficient than any Excel spreadsheet or template out there.
The Ongoing Real Estate ROI Calculator-Excel Template Debate
If you’ve been wanting to increase your income and augment your cash flow, one of the best ways to do so is real estate investing. Rental property investment, in particular, is one of the most popular ways of boosting your monthly earnings. It is why a huge chunk of real estate investors today are on the lookout for rental properties.
Given how expensive real estate is, plus how costly running a rental property business can be, potential investors typically ask, “Is this property worth investing in?” It can be answered by taking a look at the property’s profitability – the potential return on investment or ROI and the cash on cash return.
All investment properties can potentially generate income, but not all of them are profitable.
Profit, by definition, is the amount of money earned on top of the ones spent on building and running the business. As an investment property, a rental property offers the potential for gains and losses. It’s just a matter of knowing which properties will generate a positive cash flow enough to become self-sustaining and profitable.
Investors know that the investing game is all about numbers. It is where the lot is divided as one group prefers to do their computations and projections using an Excel spreadsheet template while another believes an ROI calculator is the way to go.
Computing the ROI for a property is a science in itself. The more accurate the numbers you put in, the more precise the projection you get. In the ongoing real estate ROI calculator-Excel spreadsheet debate, it is the one thing that will most likely determine which approach is better.
Related: Real Estate Calculator: What Are the Different Types and How Do They Help Investors?
How to Create a Real Estate ROI Calculator Using Excel
Let’s take a look at the first method that a lot of investors use to compute ROI: Excel spreadsheet templates.
Let’s set the stage first. You chance upon an investment property in Huntsville, Alabama that costs $200,000. According to the seller, you can easily get an additional $1,400 in monthly rental income on the said property.
Now you think to yourself, “An extra $1,400 monthly? That’s a lot!” But is it, really?
You’re not seeing the entire picture just yet. This is where running the numbers with the actual market data becomes relevant. The rental income is just half of it. The other half is the expenses involved in owning an investment property.
For one, you need to factor in the property price upon purchase and all the associated fees and charges that go with it. Then, you need to consider property rehabilitation costs, as well as maintenance.
Additionally, there are your operating expenses to ensure your rental property business runs smoothly. You need to count all relevant expenses, as well as incidental costs when you compute the ROI on the investment.
Rental Property Analysis Using an Excel Template
To get us a step closer to enlightenment on the real estate ROI calculator-Excel spreadsheet debate, we need to discuss how to use both methods. Let’s take a look at how to create a rental property spreadsheet template using good old Excel.
Below are the steps needed to create a rental property Excel spreadsheet:
1. Estimate the Property’s Fair Market Value
As an investor, there are various real estate investing tools available at your disposal. The tools can help you determine how much a property is currently worth in the market. Using multiple tools will allow you to create a range of values that you can use for comparisons.
- Comparative Market Analysis (CMA). A CMA gives you an idea of the prices of similar homes recently sold and how much they are listed on the MLS.
- Financial Metrics. Metrics such as the Gross Rent Multiplier (GRM), cap rate, and cash on cash return can help you see how profitable your investment is. We recommend using cash on cash return for profitability projections as it takes into account financing methods in the computation.
- The 1% Rule. The rule simply states that the rental income on a property should be no less than 1% of the purchase price. By this rule alone, we can conclude that $1,400 in monthly rental income on a $200,000 Alabama property isn’t ideal at all.
2. Forecast Your Operating Expenses
Owning a rental property comes with certain expenses unique to it. Unlike house flipping, rental property businesses incur both one-time and recurring expenses. You need to factor such things in when calculating your ROI.
One-time costs include property purchase price, closing costs, and realtor fees. Recurring costs include repair and maintenance, utilities, mortgage payments, HOA fees, taxes, property management fees, and insurance, among others.
Regarding costs, many investors use the 50% Rule, which assumes that half of the rental property’s gross income will go to operating expenses (which do not include mortgage payments). So, going back to the Alabama property, using the 50% Rule, you will be left with only $700 in earnings.
However, the 50% Rule is good as a screening tool to show you how much you can profit. It is still better to use actual market data, like real estate comps, than make assumptions on expenses. This way, you can input realistic and market-accurate data in your Excel template.
3. (Conservatively) Determine Market Rental Rates
As mentioned earlier, earning an extra $1,400 monthly may make an income property attractive as it is easy to get overwhelmed by the potential income. However, wise investors know better and manage their expectations with more conservative projections.
If the estimated conservative rates are enough to cover the basic operating expenses, there’s a greater chance that you’ll see a bigger profit, especially if the rental market is performing well. On the other hand, if, by your conservative estimate, the rental income barely breaks even, you might want to rethink your strategy, given the level of risk involved.
Rental comps are a good place to start for such a type of analysis. Online real estate platforms can give you a good idea of what a particular rental market looks like. Sites like Zillow and Realtor.com are excellent sources of market data.
A real estate website like Mashvisor, on the other hand, gives you more than just access to current market data. You can use real estate investing tools like a real estate heatmap and an investment property calculator.
Also, Mashvisor provides users with rental comps that will paint a realistic picture of how a particular rental market is performing financially. It will give you better accuracy in projecting your ROI, something that an Excel template cannot do.
To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.
4. Project Rehab, Repair, and Updating Costs
If you’re buying a property that is in need of some fixing, you must take the cost of repairs into account. Now, if you have enough money to buy turnkey properties, you don’t need to worry about repairs and maintenance for quite some time. However, you might still want to do a few upgrades so you can charge better rental rates.
In both cases, you need to know how much the home improvements will cost you, as it will count as part of your capital funding for your rental property investment. Ask your realtor or a local property manager for at least three quotes from different contractors, so you have options.
All of the above should go into your Excel spreadsheet so you can determine what your cash flow will be like at the end of the day.
Mashvisor, specifically its real estate heatmap tool, provides investors access to comprehensive and up-to-date market data.
Why Focus on Cash Flow?
Cash flow is the difference between your income and your expenses. Many investors miscalculate their cash flow. They tend to overestimate the potential income and underestimate the expenses related to rental properties.
Creating a cash flow statement will help you determine if a particular investment property is worth investing in.
Generating several what-ifs will help you see how your cash flow – and your ROI – will be affected under different circumstances. Like, what will happen if the rental rates go down in your subject property’s neighborhood? How will off-season occupancy rates affect your vacation rental? How soon can you financially recover from an unexpected major home upgrade on the rental property?
Here are some of the questions a cash flow statement will help you answer. As an investor, you need to come up with a cash flow analysis for a subject property that includes the following:
- Gross annual rental income, assuming you get 100% occupancy
- Effective gross rental income to show the difference between the gross annual rent and vacancy loss
- Leasing and property management fees
- Repairs and maintenance
- Utilities
- Property taxes and insurance
- HOA fees
- Other incidental expenses (landscaping, pest control, and business-related expenses, among others)
Related: What Is a Cash Flow Calculator for Real Estate Investors?
Is Using an Online Real Estate ROI Calculator More Efficient?
Using an Excel template entails manually entering the data and creating the formulas. The thing about using an Excel spreadsheet instead of an ROI calculator is you are running the risk of inputting incorrect data. Even the slightest input error will significantly impact the overall results.
This is why when it comes to the real estate ROI calculator-Excel spreadsheet debate, we choose the ROI calculator.
A rental property ROI calculator will help you find the best investment opportunities that align with your goals and needs as an investor. It uses traditional and predictive data analytics along with current trends in the 2022 US housing market to crunch the numbers for you.
A calculator eliminates the need to manually input data in an Excel spreadsheet, significantly lowering the risk of errors and miscalculating. It saves you plenty of time performing an investment property analysis; you get to spend more time on the actual development and operations of your rental property business.
One of the best ROI calculators out there today is from Mashvisor. It’s advanced yet very user-friendly. Mashvisor provides real estate market data from its massive and regularly-updated database for the most realistic and accurate projections.
It is also highly interactive and intuitive. It means that while the system will generate projections using defaults from actual comps, it adapts to the data you manually input based on your own research. If you change any number in your calculations, it will automatically make the necessary adjustments to give you accurate results.
To learn more about how Mashvisor can help you find profitable investment properties, schedule a demo.
Wrapping It Up
The real estate ROI calculator-Excel spreadsheet debate will ultimately boil down to your preference. However, if you’re an investor and you want to come up with accurate and realistic projections with the least amount of human error, an ROI calculator is your safest bet.
Using Mashvisor’s investment property calculator not only helps you compute your ROI but also leads you to profitable properties that are more suited to your investment goals. As an investor, you would want to obtain the most accurate ROI projections so you can make wiser decisions moving forward.
By using Mashvisor’s calculator, you are guaranteed access to the most relevant information and up-to-date data on practically every market in the country today.
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.