Before buying an income property, you must first gauge its profitability. Using a real estate ROI calculator can help you find a good investment.
Table of Contents
- How Do You Calculate ROI on Real Estate?
- What Is a Real Estate ROI Calculator?
- Where Can I Find a Rental Property ROI Calculator?
- What Calculations and Data Does a Real Estate ROI Calculator Provide?
Buying a rental property can be a highly rewarding investment—that is, if you know what you’re doing. As every property investor should know, profits are driven by the math behind the real estate deal. However, the process can be complicated as there are a lot of numbers and ratios used to calculate ROI in real estate.
Beginner real estate investors often ask: How do I know if I’m getting a good deal? Will I make money on my investment? Will my estimate for income and expenses work out?
It’s normal to have second thoughts about investing in real estate, especially if you lack experience in this type of venture. The good news is that with the availability of advanced technology, finding a profitable investment is made a lot easier. With the various tools available online, even new investors can, without a doubt, find a successful investment property.
One of the best ways to determine if an investment property is worth your time and money is by using a real estate ROI calculator. By using an ROI calculator, you can easily identify the potential income from the income property and see if it can generate sufficient returns to make a good profit.
Mashvisor is a good place to access a real estate ROI calculator, as it doesn’t only offer ROI calculations. It also provides all the necessary information needed to determine a profitable investment.
How Do You Calculate ROI on Real Estate?
Calculating the return on investment in real estate is crucial before you decide to buy an investment property. By doing this, you’ll be able to find out whether an income property will be a good investment or not.
While a real estate ROI calculator is usually available online, understanding how the ROI is calculated is important. It allows you to learn about the figures used in the calculation. Generally, most ROI calculations are relatively simple. In real estate investing, the return on investment is equal to the gain less the cost of investment, then you divide the result by the total investment cost.
In other words, you need to first determine the total returns that an investment property generates, as well as the original cost of the investment. Then, you need to subtract the original cost of the investment from the total returns. Once you find the difference, you divide it by the total investment cost, and the result is your return on investment in percentage form.
Formula for ROI
To illustrate it more clearly, here is the formula for calculating the return on investment in real estate:
ROI = (Total Gain − Investment Cost) / Investment Cost
However, the above formula may vary depending on the type of real estate investment strategy. Several factors can affect the general calculation of the ROI, including the costs of repair, maintenance, and improvement, the initial loan amount to finance the investment, and mortgage rates. It’s best to take consider the said factors to get an accurate ROI figure.
Let’s take a look at the following investment strategies that most real estate investors make and how the return on investment is calculated based on each strategy.
Flipped Property Investing
One of the most common real estate investment strategies is fix and flip. In the fix and flip strategy, an investor buys a fixer-upper property, fixes and improves it, then resells it for a profit. Let’s assume that the resale is a cash deal, which means the investor doesn’t need to account for a mortgage in the calculation.
Let’s say an investor buys a property to fix and flip. The purchase price is $150,000. The investor knows that after repairing the house, it can sell for $250,000. The investor spends $50,000 for repair and improvement. Then, the property will be listed on the market for $250,000 after the repairs are completed.
Based on the above scenario, the ROI calculation will be as follows:
ROI = ($250,000 − $200,000) ÷ $200,000
ROI = 25%
Therefore, the investor from our first example will realize a 25% return on investment after selling the fix-and-flip property.
Rental Property Investing
Another popular real estate investment strategy among real estate investors is investing in rental properties. Owning a rental property allows investors to earn regular income in the form of rent. If this is your chosen real estate investment option, the method for calculating the ROI may be slightly different.
Make sure to perform the following steps to get the ROI figure:
Find the Estimated Annual Rental Income
To calculate the ROI of a rental property, you need to estimate your annual rental income first. It can be done by looking at the rental comps, which refer to similar rental properties in the area.
You need to find the average monthly rent for that particular type of property. To determine the potential annual income, you need to multiply the rent by 12.
Estimate the Net Operating Income
You can use the potential annual rental income figure to estimate the net operating income. To calculate the net operating income, you need to subtract the annual operating expenses from the annual rental income.
Make sure to include all possible expenses, such as repairs and maintenance, property taxes, insurance fees, and homeowners association (HOA) fees. However, do not include the mortgage payments and interest.
Calculate the ROI
After you’ve obtained the figure for net operating income, the next step is to calculate the potential ROI of a rental investment. Assuming that the property is bought through a mortgage, you need to divide the net operating income by the outstanding mortgage to determine the ROI.
Below is the formula that you can use for this rental property investment strategy:
ROI = (Annual Rental Income − Annual Operating Expenses) ÷ Outstanding Mortgage Value
Methods for Calculating ROI
After learning the formula for calculating ROI on the two common types of real estate investments above, the next step is to find the different methods for ROI calculation. They are the following:
1. Using Manual Calculation
Since the formulas are pretty simple, you can calculate the ROI of a real estate investment manually on your own. To do it, you need to make sure that you have all the needed information available. If you are comparing investment properties, it’s best to get accurate ROI figures to help you make the right decision.
2. Using Excel
You can also calculate the potential ROIs of different income properties using Excel. All you need to do is input the data and formula on an Excel worksheet, and it will automatically calculate the ROI for you. Similar to calculating manually, however, the Excel calculation method also requires you to input the correct figures to be able to get an accurate result.
3. Using an Online Real Estate ROI Calculator
Fortunately, with the availability of online real estate ROI calculators, investors can easily compute the ROI of an investment property without doing the manual calculations themselves. The good news is that there are online ROI calculators that also provide all the information that you need to get an accurate result.
In the next sections, we will discuss what a real estate ROI calculator is and where you can find one.
What Is a Real Estate ROI Calculator?
Whether you’re deciding if you should move forward with a real estate deal or assessing the performance of an existing income property, running a thorough property analysis is key. Luckily for today’s real estate investors, you no longer need to spend months collecting data and running the numbers on multiple rental properties using Excel to be able to evaluate them.
In the age of data and predictive analytics, you can now use real estate investment tools that will provide you with everything you need to run your ROI calculation and make the right decision in a matter of minutes! One of these tools is the investment property ROI calculator.
Also known as the rental property ROI calculator, this is an online tool that helps real estate investors find the best investment opportunities that meet their criteria in any housing market. To do it, the tool uses traditional and predictive data, as well as housing trends to calculate basic real estate ROI analysis metrics for you.
Hence, it eliminates the need to gather data and fill in spreadsheets. In turn, this makes calculating ROI easy and helps investors save time and effort when deciding whether or not a rental property is worthwhile. In such a way, you can focus on operating your rental property business and, most importantly, make decisions based on accurate data and ROI calculations.
Benefits of Using Real Estate ROI Calculator
Using a real estate ROI calculator to determine the potential profitability of an investment property is more advantageous compared to doing a manual calculation. Here are the benefits of calculating an investment property’s potential returns using an ROI calculator:
1. Less Error
Manual calculations are prone to human error. That is why using a real estate ROI calculator is preferred by busy investors who don’t want to keep verifying the accuracy of the results.
2. Easy to Use
In general, an ROI calculator is easier to use than calculating through a spreadsheet or doing manual calculations. With Excel, you’ll need to input your formulas manually, as well as the figures that you need.
With an ROI calculator, on the other hand, computations are automatically done based on the given figures. You don’t even need to know the formula to do the computations using an ROI calculator.
3. Quick Results
Since most ROI calculators are available online, you can expect quicker results than manual computation. Plus, if you use Mashvisor’s investment property calculator, you won’t need to research the required details because they are automatically provided for you.
Where Can I Find a Rental Property ROI Calculator?
Most rental property ROI calculators are found online. In fact, there are a number of real estate investor websites that offer access to a real estate ROI calculator. However, keep in mind that not all online calculators are made equal. When choosing the best ROI calculator, make sure to consider the accuracy of the data, as well as the ease of use.
What Is the Best Real Estate ROI Calculator?
One of the best real estate ROI calculators available online is from Mashvisor. If you’re wondering what Mashvisor is, it is a real estate analytics platform that provides a number of tools that make investors’ lives easier and more efficient. One of the said tools is the investment property calculator, which helps investors decide which income property is worth investing in.
Using Mashvisor’s investment property calculator lets you compute the potential returns of a property without researching the net operating income and expenses. The data is already provided when you use Mashvisor’s analytics platform, making your life a lot easier. As a result, it’s possible for you to get accurate results in no time.
Moreover, Mashvisor’s platform also allows you to search for available income properties for sale in the city or neighborhood of your choice. Plus, you can analyze the properties’ potential real estate ROI, the real estate comps, and the housing market itself! You can do all of them online—without leaving the comforts of your home.
If you want to find the best investment properties with the most attractive profit margins, try using Mashvisor’s investment property search feature. Once you find a property that interests you, click on it to see all the data that you need. Additionally, you can use the real estate ROI calculator to know if such property is worth your time, effort, and money.
Why Should I Use Mashvisor’s ROI Calculator?
There are a number of things that make Mashvisor’s calculator different from other available ROI calculators out there. First of all, Mashvisor’s real estate ROI calculator is advanced, yet easy to use. All you need to do is plug in your data and financing information for the tool to activate.
Secondly, Mashvisor also automatically shows you readily-calculated data and numbers regarding the investment property. The numbers include income, expenses, and cash flows. Third, the tool is interactive, which means you can easily input your financing details to include in your computation. Afterward, it will re-estimate the ROI calculations and give you accurate results.
It allows you to customize the expenses if, for example, you plan to spend more on repairs and other costs. In addition, you can also take into account your financing method in the ROI calculation if you plan to buy the property through a mortgage. It will provide you with a more personalized result based on the mortgage details that you entered.
Not Sure Which Rental Strategy to Go for?
Our rental property calculator also provides investors with not only traditional rental data but Airbnb rental data as well. It is why we often refer to our calculator as the Airbnb Profitability Calculator. This is a great option if you are not yet sure which rental strategy you would take, as this allows you to see side-by-side which rental strategy will be more profitable.
Whether you’re planning on investing in rental property as a traditional landlord or as an Airbnb host, using the profitability calculator can help you save a lot of time. Needless to say, calculating ROI in real estate, choosing the optimal rental strategy, and projecting your future profits have never been easier, thanks to Mashvisor’s investment property ROI calculator.
To learn more about how Mashvisor can help you find profitable investment properties, schedule a demo now.
What Calculations and Data Does a Real Estate ROI Calculator Provide?
When choosing a real estate ROI calculator to work with, it’s important to check the available data that the calculator provides. Since not all ROI calculators available online provide accurate and complete real estate data, it’s best to be prudent in finding an investment tool that can help you make an educated decision.
As mentioned, the best real estate ROI calculator uses analytics to calculate potential returns from income properties. It also provides real estate ROI analysis metrics for properties and runs an investment property analysis. Calculating the said metrics is important for real estate investors to determine whether a particular income property is worth investing in.
Here are the ROI calculations and metrics that the real estate ROI calculator from Mashvisor provides:
1. Comparable Rental Income
The comparable rental income refers to the expected monthly rent you can generate from a property. You can view how much you’ll be making if the property is rented out traditionally (as a long-term rental) compared to if it’s listed on Airbnb (as a vacation or short-term rental). It allows you to see which rental strategy is best for a specific investment property.
Mashvisor uses comparable data based on the rental income generated by similar properties in the same location. Typically, the rental income is calculated according to the bedroom ratio from traditional rentals and Airbnb listings in the area. This information allows us to find the right rental income estimate depending on the rental strategy used.
So why is it important to find a comparable rental income? Some investors, especially beginners, are still unsure about their preferred rental strategy. By seeing the comparison of rental income from a traditional rental and Airbnb, you’ll easily find which strategy generates more profits.
In fact, even if you’ve already decided on which strategy to follow, seeing the comparable rental income can help you determine whether a particular property is good for your chosen strategy. If the property you are eyeing can not generate sufficient income for your preferred rental strategy, you can look for another one.
Are you unsure which rental strategy will bring you a higher ROI on rental property? Read our guide to Real Estate Investing: Traditional vs. Airbnb.
2. Rental Expenses
Rental expenses are the monthly costs associated with a rental property. In general, rental expenses will affect a property’s profitability. Expenses that the real estate ROI calculator accounts for include the one-time startup costs (like closing, inspection, and repair costs) and recurring costs (like utilities, insurance, taxes, and maintenance costs).
What’s nice about Mashvisor’s investment calculator is that it allows you to customize the expenses according to your preference. For example, if you plan to set aside a budget to improve the property, you can add your planned renovation costs to the calculation. It will provide you with a more personalized and accurate result.
3. Cash Flow
Every real estate investor wants to make positive cash flow from rental properties. Cash flow refers to the profit you’ll generate each month from renting out the property after subtracting all expenses from the rental income.
Since Mashvisor’s tool already calculates both ROI analysis metrics, naturally, it will provide you with readily-calculated cash flow estimates, as well. By seeing the cash flow calculation, you will know which property will make a good investment, and which one you should stay away from. In short, it ensures you don’t end up buying a rental property that doesn’t generate profits.
4. Cash on Cash Return
One of the most important ROI calculations the Mashvisor calculator provides is the cash on cash return. The cash on cash return figure tells you what rate of return on investment you can expect based on the cash you initially invested in the income property.
It takes into account your financing costs (including the down payment and interest rate), in addition to other expenses paid in cash (like closing costs and commission fees). The traditional and Airbnb cash on cash return is then calculated by dividing annual returns from the property by the total cash investment.
Cash on cash return is an important metric that is used by most investors to gauge a property’s profitability. In general, a cash on cash return of 8% to 12% is considered ideal. However, the number may vary depending on the location of the property.
Typically, real estate markets with high appreciation rates provide lower cash on cash returns. Thus, anything lower than 8% may still be a good investment. But only for as long as the property is located in a hot real estate market.
5. Cap Rate
Another metric that the real estate ROI calculator automatically estimates is the capitalization rate or cap rate. The cap rate metric evaluates how an investment property will perform. That is, assuming it was paid for in cash and not with a loan.
To calculate the cap rate for rental property, real estate investors divide the net operating income that the property is expected to generate by its current market value. Moreover, Mashvisor’s investment property calculator lets you see both the traditional and Airbnb cap rate of the property.
6. Occupancy Rate
The occupancy rate is simply the number of days that you can expect the property to be rented per year. As for the Airbnb occupancy rate, Mashvisor gathers data and information from actual (and active) Airbnb rental listings.
We then analyze historical data and housing market trends like rental rates, booked nights, and available nights. It enables Mashvisor to project what kind of Airbnb occupancy rate you can realistically expect for the income property.
7. Real Estate Comps
Since our real estate ROI Calculator offers predictive analytics of properties for sale across the US housing market, there’s a bonus feature that real estate investors will certainly appreciate. Using AI algorithms and machine learning models, Mashvisor provides a list of recently sold real estate comps and rental comps in the area that are similar to your subject property.
With the above information, investors don’t need to spend months searching for comps and doing a manual real estate market analysis. Instead, you can find real estate comps along with important real estate data with just a click of a button.
The Bottom Line
The key to success in real estate investing lies behind running the numbers associated with real estate deals before making a purchase. To stay ahead of the competition, today’s savvy investors use advanced tools to perform rental property analysis quickly and efficiently. One such tool is the real estate ROI calculator.
Yes, you can definitely calculate an investment property’s ROI manually. But using a real estate ROI calculator will provide a more accurate result, fast. The best rental ROI calculator available online is Mashvisor’s investment property calculator. It provides in-depth analysis that helps you make an informed decision.
With this tool, you won’t waste time creating Excel spreadsheets, searching for property data, or calculating ROI manually. Plus, you’ll also see which investment strategy will generate the most profits for a specific investment property.
If you’re starting an Airbnb, make sure to use Mashvisor’s Airbnb calculator and analytics tool to find a lucrative property. By providing complete and accurate real estate data, Mashvisor is the best place to find a profitable Airbnb investment property.
Start analyzing investment properties to make smart decisions. Start out your 7-day free trial with Mashvisor now.