Real Estate Investing 101: How to Calculate Rental Income

When buying an investment property, having access to the right tools is power, and one of the must-have tools is the rental income calculator.

Table of Contents

1. What Is Rental Income?
2. How to Calculate Rental Income
3. 3 Methods to Estimate Rental Rate
4. What Is a Good Rate of Return on Rental Property?

Rental income is one of the real estate basics. Knowing how to calculate rental income can make the difference between owning a successful investment property and a misjudged financial burden. Thus, it is crucial for a savvy real estate investor to find out how to perform these calculations in the most accurate and effective way.

The most efficient method of computing the revenue from a real estate income property is with the help of a rental income calculator. However, it’s important not just to trust the numbers that such a calculator provides for you blindly. You must also understand the figures behind the rental income of a property, where they come from, and how to use them to make smart investment decisions.

That’s why in this article, we will look at what rental income is, how it is calculated, and how it is used to calculate other metrics of return on investment in real estate. We will also look at how technology helps make the real estate investing journey easier and more profitable.

Lastly, we will discuss the Mashvisor rental income calculator and what makes it the best tool in the current real estate market. A hint: This calculator helps you compute not just the rental income but also other metrics like cash flow, cash on cash return, and cap rate on thousands of properties in a matter of minutes.

So, without further ado, let’s dive in.

What Is Rental Income?

Rental income is the rent payments you receive from your tenants for occupying and using your property. Depending on the lease agreement and the type of rental property that you own—long term or short term rental—you’d probably collect rent either on a monthly or a daily basis.

Typically, traditional rental units are leased for longer periods; therefore, rent is paid monthly. Vacation home rentals, meanwhile, are usually only rented out for a couple of days; in such a case, you can collect rent payments per night or at the end of the guest’s stay.

It’s important to note the difference between gross rental income and net rental income.

Gross rental income is what we mentioned above – the total amount of money you collect from renters. It can include things like utility bills and repairs if covered by the renter. It can also account for cleaning fees and meals if you run an Airbnb business. Keep in mind that a security deposit for a long term rental property is not part of the rental income.

Net rental income, also referred to as taxable rental income, is the gross amount of received rental income minus allowable rental expenses. Tax-deductible expenses include:

• Property tax
• Mortgage interest
• Property insurance
• Private mortgage insurance (PMS) premiums
• Depreciation
• Property maintenance
• Pest control
• Rental property repairs
• Cleaning services and supplies
• Utilities, including electricity, gas, water, TV, wifi, garbage collection, etc.
• Rental property marketing and advertising costs
• Fees paid to collect rent

The net amount can be positive or negative. In case the gross rental income exceeds the rental expenses, you end up with a net rental income (positive net). Alternatively, in case the gross rental income is less than the allowable expenses, you end up with a net rental loss (negative net).

How Is Rental Income Taxed?

As a beginner real estate investor, you need to learn how to calculate taxable rental income for two reasons. First, paying due taxes ensures you stay within the law and don’t get in trouble with the IRS. Second, knowing what expenses to deduct allows you to minimize your tax bill and maximize your cash flow and return on investment.

Generally speaking, rental income is taxed like any other type of income. The main difference is that you can deduct allowable expenses, listed above, from your taxable income and reduce your tax bill. Depending on your rental property type and management, tax deductions can add up to a hefty sum, and removing them from your tax bill will provide a major benefit.

As an investor aiming to optimize your rental property taxes and thus your return on investment, you should keep in mind that deductions are taken the same year in which you spend the money.

The only noticeable exception to this general rule is depreciation. As long as you use your property as an income-producing asset, you can spread the cost of buying your investment, excluding the cost of the land, over 27.5 years. It is what the IRS considers the useful life of a residential real estate property in the US market.

Since the purchase price is the highest expense related to starting and running a rental property business, depreciation is usually the most significant tax deduction on rental income.

To report your rental income tax, you need to use Form 1040, U.S. Individual Income Tax Return. If you qualify, you might need to use Form 1040-SR, U.S Tax Return for Seniors, instead.

Rental Income Taxes on Vacation Homes

If you own a second home that you rent out some of the time and keep for personal use the rest of the time, your tax situation might become a bit more complicated. You’ll need to consider the number of days for which you rent out and the number of days for which you use the property for personal reasons:

• If you rent out your vacation rental property for no more than 14 days in a calendar year, you don’t have to report rental income, and you don’t have to pay taxes on it. The reason is that your house is considered a personal residence. You can still deduct property tax and mortgage interest when filing your tax return.
• If you rent out for 15 days or more and use the home for up to 14 days in a calendar year, you need to report your rental income and pay taxes on it. You can deduct allowable rental expenses for the portion of the time when the house is rented out.
• If you rent out your house for 15 days or more and use it yourself for more than 14 days in a calendar year, it is counted as your personal residence. It means that you can deduct property tax and mortgage insurance in addition to allowable rental expenses up to the level of the rental income.

Make sure to understand all the above nuances and use them to your advantage as they apply to your particular situation in case you start an Airbnb business. Tax deductions are one of the biggest benefits of real estate investing and can make the difference between running a money-making vs. a money-losing vacation rental property.

Related: 75 Top Locations for Airbnb Income in 2022

How to Calculate Rental Income

Now that you know what rental income is, there is another pressing question that we need to answer: How do you calculate rental income?

How to calculate income for an investment property depends on whether the property is already rented out to tenants or the house is still vacant.

Calculating the Income of a Tenant-Occupied Rental Property

When an investment property has renters in place, calculating the rental income is very easy and straightforward and does not require the use of a special calculator. All you have to do is to look at the rental rate, and this is your rental income.

In the case of owning a short term rental property, you also need to include the cleaning fees, utilities, and any other fees covered by the guests.

Here’s how you calculate the gross monthly income.

Calculating the Income of a Vacant Property

Things get a bit more complex when you want to see what rental income you can expect from an unlisted property. There are a few different methods you can use as a real estate investor to determine the rental rate that you should charge on your income property. We will discuss them later in this article.

In brief, you need to use rental comps, the 1% rule, or a trustworthy rental property calculator to compute what monthly or daily rental rate for a traditional or Airbnb property. Once you know the rate, you can easily calculate the rental income per day, week, month, or year.

Annual Rental Income

In addition to being able to calculate the monthly rental income, a savvy investor should also learn how to compute an investment property’s annual rental income. It is the number that we use for most return on investment metrics and tax purposes.

If you own a long term rental property, calculating the annual income requires multiplying the monthly rental rate by the number of months your property gets rented.

If you run a vacation rental business, your Airbnb occupancy rate might fluctuate more. So, in order to calculate the annual income, you have to sum up the revenue that you were able to generate each month.

This is how you will arrive at the annual gross rental income.

As we explained above, in the US housing market, taxes are paid on the net – or taxable – income. The taxable income is calculated by taking the gross annual rental income and subtracting all allowable rental expenses.

What Is a Reasonable Rental Income?

A reasonable rental income is revenue that assures positive cash flow at the end of each month. It means that your rental income should exceed your rental expenses, making sure you make money rather than losing money. Usually, 1% or more of the property purchase price is considered a reasonable rental income per month.

Generating a good rental income is crucial for the success of a real estate investing endeavor. After all, the income is present in all return on investment formulas, in one way or another. In this sense, assuring a reasonable rental income is equivalent to ensuring a good rate of return on a rental property.

Next, we will look at the three most popular methods to calculate a reasonable rental income for a property based on the rental strategy, location, and property specifications. These include:

• Rental comps
• 1% rule
• Rental income calculator

3 Methods to Estimate Rental Rate

Before you buy a rental property, you must conduct a detailed investment property analysis. Estimating the rental value of the investigated property is one of the most important metrics to figure out during your analysis.

In general, investors apply three main methods to calculate rental income on a property they consider buying: rental comps, the 1% rule, and a rental property calculator. Let’s look at each of them, what it implies, how it is used, and how reliable the results are.

Using Rental Comps

The most practical way to go about finding the rental rate of a house is to look at real estate comps. Setting the right rental rate can make or break the attractiveness of your property. You could find the best rental property but not succeed. Why?

Well, if you set the rent too high, tenants won’t be interested. If you set the value too low, you won’t be maximizing profit, and the investment could be a bust. Real estate comps play a crucial role in avoiding such unfavorable situations.

What Are Rental Comps?

These are rentals comparable to your prospective property. In other words, these are active rental properties that are similar to the one you are analyzing and that are located in the same area. Note that when we say “similar rental properties,” we don’t mean exact. Because realistically, it would be near impossible to find two identical properties to compare.

However, if you locate a couple of similar properties and adjust for their differences, such as features and exact location, you can determine a suitable rental rate. By researching similar rental properties in the local market and determining the prevalent rental rate, you can set an acceptable rental value for your own investment property.

Where Do You Find Rental Comps?

To find good rental comps, traditionally, you had to search the area, talk to existing landlords or Airbnb hosts, or check out long term or short term rental websites. As you can imagine, they take a lot of time and effort, and time is money in the world of real estate investing.

Alternatively, you can check out Mashvisor. Our real estate investment platform gives you access to traditional and Airbnb rental comps for thousands of available MLS listings and off market properties. For each property for sale that you analyze, in the Rental Comps & Insights section of our calculator, you can find dozens of comparables in the area, including the most significant data points:

• Similarity to your property
• Distance from the house you are analyzing
• Number of bedrooms
• Number of bathrooms
• Monthly rental rate

For Airbnb rental comps, you also see:

• Location
• Airbnb occupancy rate
• Airbnb nightly rate
• Rating and reviews

Importantly, all real estate data comes from publicly available, trustworthy sources, including the MLS, Zillow, Redfin, Rent Jungle, Airbnb, and others. Then, our Data Team applies our unique machine-learning algorithms to this big data. It helps to identify the closest comparables for any property in the US residential real estate market.

Related: How to Get Access to the MLS Database Without a License

When looking at the rental comps provided by Mashvisor, we recommend focusing your rental income analysis on the ones with a similarity score of 80% and above. In this way, you can rest assured that your analysis will be based on houses that are as similar to yours as possible.

Calculating Rental Value Using Comps Step by Step

Computing the rental rate that makes the most sense for your investment property requires going through the steps outlined below:

1. List the most prominent features of your rental property: First, analyze your house and find out the main characteristics. These include the address, property type, age, number of floors, number of bedrooms and bathrooms, amenities, and finishing.
2. Find 3-5 active rental listings in the area with comparable features: Second, you need to conduct rental market analysis to identify a few rentals with the same characteristics as your property. Ideally, these need to be located within a mile of the house you are considering.
3. Figure out the rental rate of each comp: Third, find out how much each of these comparable properties charges. You might need to check out rental property websites, ask around, or even contact the landlord/Airbnb host or tenants directly. It might turn out not as easy as it sounds.
4. Identify the level of similarity/difference between your property and the comps: Next, study each comparable rental and note the main features and how it compares to your property. Ideally, the comps will have the same number of floors, bedrooms, and bathrooms and be of the same age as your house.
5. Adjust the rental value based on differences: Once you know the main dissimilarities between the comps and your property, you can adjust their rental rate up or down to calculate the rental income that you should ask for your investment property.

While five steps don’t look like a lot to compute the reasonable rental value of your investment, they might take days or even weeks. It depends on how seasoned of an investor you are and what access you have to reliable real estate and rental data.

Using Rental Comps: Example

Here’s an example of how to calculate rental income with rental comps and without a calculator.

Imagine the following scenario: An investor is looking at Property 1, which was built in 1995, has 2 floors, 3 bedrooms, and 2 bathrooms, and is relatively well-maintained. It has 2 parking spaces and a nice backyard. The investor wants to know how much they can rent out the house for before buying it.

Through extensive research, the investor is able to find the following rental comps:

• Rental Comp 1 was built in 1990, with 2 floors, 3 bedrooms, 2 bathrooms, 1 parking space, no backyard, but a spacious front veranda. It rents out for $2,500 per month.
• Rental Comp 2 was built in 1997, with 2 floors, 3 bedrooms, 3 bathrooms, 2 parking spaces, and a backyard. It rents out for $2,900 per month.
• Rental Comp 3 was built in 1993, with 2 floors, 2 bedrooms, 2 bathrooms, 2 parking spaces, a front veranda, and a backyard. It rents out for $2,200 per month.

All the properties are within half a mile from Property 1 and are comparable, with reasonable differences. Based on these comps, the possible rental value range is between $2,200 and $2,900. Comparing Property 1 to each of the comps more closely shows us that the most appropriate rental rate is around $2,700.

The above is a scenario we created to demonstrate the concept of using rental comps to calculate rental income without a calculator. But you can imagine how much time and work it will take to obtain this type of information in real life. That’s why this method is not the most efficient for beginner and part-time investors who don’t have access to all the required data.

Using the 1% Rule

The second most popular method to calculate the rental rate of an income property is the 1% rule. Compared to the rental comps methodology, the 1% rule in real estate is more straightforward and requires less data and calculations.

What Is the 1% Rule for Rental?

The 1% rule in real estate investing is an efficient way to calculate what rental income you can expect based on the purchase price of the property. According to this rule of thumb, the monthly gross rental rate should amount to no less than 1% of the home purchase value.

As you see, the main benefit of using this rule is that it is very easy and quick to calculate. Moreover, it doesn’t require any additional data that beginner investors might not be able to find.

Nonetheless, it has a major disadvantage. Specifically, the 1% rule does not guarantee that the rental value that you set will be competitive in the local market. It is because the rule does not consider how much rent similar properties charge.

Calculating Rental Income Using the 1% Rule Step by Step

Applying the 1% rule to any property that you consider investing in takes just a couple of simple steps, outlined here:

1. Get the purchase price of the property: This is usually available with the real estate listing, whether you find it online, by driving for dollars, or through a broker. For more accurate results, you can talk to your real estate agent to evaluate whether the final purchase price will be very different from the listing price.
2. Calculate 1% of the sales price: Using a basic calculator, compute 1% of the expected purchase price. It is the minimum rental rate that you should set for the property for sale to end up with positive cash flow and a good return on investment.

Getting an estimate of the rental rate you can expect through the 1% rule requires only two steps and a simple calculator. That’s why it is a good method for investors still researching and doing preliminary analysis of multiple properties for sale.

Using the 1% Rule: Example

Now let’s look at an example of how to calculate rental income using the 1% rule and without the help of a rental income calculator.

An investor is looking at Property 2, which is listed for sale for $250,000. The investment property for sale is located in a very hot seller’s market. As such, the investor’s agent thinks it’s reasonable to expect a final purchase price 10% above the listing price. It means the expected purchase price is $250,000 x 1.1 = $275,000.

To calculate the expected rental value using the 1% rule: $275,000 x 0.01 = $2,750 per month.

As you can see, the above method is much faster and more efficient than using rental comps. However, it doesn’t reflect the actual performance of comparable rental properties in the local market. Consequently, charging this value might be unrealistic or make you leave money on the table.

Using a Rental Income Calculator

We’ve kept the best for last. The third and final way to answer the question “How much can I rent my house for?” is by using a rental property calculator.

What Is a Rental Income Calculator?

A rental income calculator is a real estate software tool that provides an accurate estimate of the expected rental income based on the performance of actual rental comps in the area. 

In a sense, the calculator depends on the rental comps method for computing rental income. However, it is able to factor in many more comparable properties and get the numbers much faster.

The two main advantages of the rental income calculator are: 1) the accuracy of the rent estimate, and 2) the speed with which the calculations are made. Using an online rent estimator allows investors to analyze multiple rental properties for sale to find the best deal.

What Is the Best Calculator for Rental Income in the US Market?

Naturally, not all rental property calculators are created equal. Some are just better than others. If you’re searching for the top rental income calculator, you’ve come to the right place. The Mashvisor rental calculator exceeds the performance of all other calculators available in the US market.

First and foremost, the Mashvisor real estate calculator allows investors to estimate the rental value they can expect from both traditional and vacation rental properties simultaneously. Meanwhile, the Rentometer calculator only provides long term rental data, while AirDNA’s tools offer just short term rental analytics.

Access to both allows investors to be prepared if they want or need to switch between rental strategies.

Related: AirDNA vs Mashvisor: Which One Is the Source of Airbnb Data?

Second, the Mashvisor real estate calculator relies on numerous data points coming from dozens of reliable, publicly available sources of real estate data and rental analytics. After all, a real estate investment is only as good as the data on which it is based.

Third, the Mashvisor rental income calculator is not just that. Instead, it constitutes an all-in-one investment property calculator that provides all the numbers and figures you need to make smart and profitable decisions. In addition to the estimated monthly rental rate, you also get access to readily available estimates of:

• Purchase price
• Startup costs
• Recurring monthly expenses
• Cash flow
• Traditional and Airbnb occupancy rate
• Traditional and Airbnb cash on cash return
• Traditional and Airbnb cap rate

Importantly for investors who don’t have enough cash to buy a property in full, Mashvisor doubles up as a mortgage calculator. Investors can use it to calculate the down payment, interest rate, and monthly mortgage payment on all conventional Fannie Mae and Freddie Mac mortgage types.

Computing Rental Income Using a Calculator Step by Step

Learning how to use the Mashvisor rental income calculator to analyze the expected revenue and other profitability metrics is easy. All you need to do is:

1. Set up your search criteria on the platform: You can search for available MLS listings and off market properties based on your chosen market, budget, financing method, expected rental income, expected return on investment, and other factors. The investment property search engine will return all matching results.
2. Click on a property: As soon as you click on a property from the search results, you will access comprehensive rental property analysis. It will include the estimated rental income whether you rent out on a long term or short term basis. In addition, you will see all other crucially important measures listed above.

In just two simple steps, the Mashvisor calculator shows you the monthly rental income you can expect based on the performance of similar properties in the area.

Using a Rental Property Calculator: Example

To illustrate how to calculate rental income with the help of the Mashvisor investment property calculator, we will look at Property 3, an MLS listing in the Atlanta real estate market. It is listed for $230,000, and the comparable rental income is $1,497 traditionally or $1,328 on Airbnb. These estimates are based on long term and short term rental comps.

As you see, in this case, the 1% rule is off. According to the performance of similar properties, this property will be able to generate lower revenue. So, while the 1% rule is a good preliminary estimate, investors must conduct comparable rental property analysis with the help of a reliable calculator to get more accurate numbers.

What Is a Good Rate of Return on Rental Property?

Rental income is an important metric in real estate investing. However, on its own, it does not provide a good enough picture of the investment potential of a property. It needs to be used in combination with other numbers like initial investment and recurring expenses to measure the expected return on investment.

A good rate of return on a rental property varies, depending on which metric you look at. You can measure return on investment using cash flow, net operating income, cap rate, cash on cash return, and gross yield. Each metric comes with its own pros and cons and has a different optimal rate.

Next, let’s look at the most popular ways to evaluate a good rate of return in real estate.

Cash Flow

Cash flow in real estate refers to the difference between the money coming in and going out of the pocket of an investor. In other words, this is the difference between the money generated by a rental property and the money spent on running and maintaining it.

How to calculate cash flow in real estate? On the one hand, you need to consider the gross rental income, which is the rental rate multiplied by the time the property is occupied.

On the other hand, you need to subtract all costs related to owning a rental business. These include property tax, insurance, maintenance, repairs, property management, rental licenses, marketing and advertising, utilities, cleaning fees, restocking (in the case of Airbnb), etc.

Cash Flow Formula:

Cash Flow = Gross Rental Income – Operating Expenses

The cash flow is somewhat similar to the taxable income, but there are more expenses to subtract.

Instead of the formula given above, you can use a cash flow calculator like Mashvisor and get readily available numbers.

What is a good rate of return in terms of cash flow? In rental property investing, the cash flow must be positive. If the opposite is true, it means that you are losing money from your investment. The higher the cash flow, the more money you are making. There isn’t really an upper and lower limit as long as the number is positive.

Net Operating Income

The net operating income (NOI) is another metric used to evaluate profitability in rental property investing. It is a quick formula that measures the difference between the operating income and the operating expenses.

To calculate the rental operating income, you need to add the rental income to any other income generated by the property. It can include renting out the garage, having a vending or paid laundry machine, and cleaning fees.

Then, from the total operating income, you need to subtract the total operating costs. It is the sum of things like property tax, property insurance, maintenance, fixes and repairs, marketing and advertising, management fees, and others. In other words, everything that you pay out of pocket.

As a general rule, operating expenses exclude costs that can be deducted from taxable income and major repairs, as well as the financing cost. Whether you buy your income property in cash or with a mortgage, it does not affect the NOI calculation.

Net Operating Income Formula:

NOI = Rental Income + Other Income – Operating Costs

There isn’t really a good net operating income for a rental property. But this number is used in other calculations like the cap rate. To provide a good return on investment, the NOI has to be positive. And obviously, the higher the difference between what you make on a property and what you spend on it, the better.

Cap Rate

The capitalization rate, or cap rate for short, is one of the most popular metrics investors use to calculate how much profit they can expect on their property. It is directly based on the rental income.

The cap rate calculates the ratio between the net operating income and the purchase price or the current market value of the property.

Cap Rate Formula:

Cap Rate = NOI / Property Price or Value

One of the reasons why the cap rate is so popular in the real estate industry is the simplicity of its calculation. The cap rate metric does not include the method of financing an investment property. However, it’s also one of the biggest limitations and disadvantages of the metric and why it cannot be used alone in rental property analysis.

When it comes to a good cap rate, it’s in the range from 8% to 12%. Usually, the higher the return, the better, but this is not exactly the case with the cap rate. The reason is that the capitalization rate also measures the level of risk associated with buying a rental property. You want to keep risk at a reasonable level as an investor.

To calculate the cap rate of multiple properties for sale, you can use Mashvisor’s calculator.

Cash on Cash Return

The cash on cash return, or CoC return, is another measure of rate of return frequently used by real estate investors. Once again, calculating the cash on cash return requires knowing the rental income generated by the property.

The cash on cash return comprises the total cash earned by the rental property divided by the total cash invested in the property. Importantly, this metric includes the financing method. Thus, if you pay for an income property in cash or with a mortgage, the corresponding cash on cash return will be very different.

When you buy an investment property in cash, the invested cash includes both the purchase price and the closing fees, as well as any fixes and repairs.

When you buy a rental property with a mortgage, the invested cash includes the down payment, the closing costs, the costs of repairs, and mortgage payments made up to this point.

Meanwhile, the earned cash refers to the net cash flow or the difference between the rental income and the operating expenses.

Cash on Cash Return Formula:

Cash on Cash Return = Net Cash Flow / Invested Cash

Unlike the cap rate, there isn’t a clear range that experts consider to be a good cash on cash return. But in general, a CoC return around and above 10% is thought to be good.

Related: Mashvisor: The Ultimate Cash on Cash Return Calculator

Gross Yield

Finally, a metric that is relatively easy to calculate but which is not very popular in real estate investments is the gross yield. Gross yield is defined as the return on investment before taxes and expenses.

To calculate the gross yield, you need to divide the annual gross rental income by the current market value of the property. You don’t need a special calculator to do so.

Gross Yield Formula:

Gross Yield = Annual Gross Rental Income / Current Property Price

Generally, a good gross yield ranges between 5% and 8%.

In order to make good real estate investment decisions, you need to consider the above rate of return metrics in addition to the rental income. Using an investment property calculator will make your calculations much easier and more accurate.

Conclusion

Every real estate investor wants to be successful. You want to find the most profitable locations and be able to charge the optimal rental rate for your tenants. In the end, you hope to make an acceptable rate of return from your property investment, that is, after calculating the tax on rental income.

In this regard, being able to calculate rental income before buying a property is a must in real estate. That’s why in this article, we’ve covered what rental income is, how gross income differs from taxable income, how income is calculated, and what constitutes a good return on investment on a rental property.

At the same time, doing a ton of data collection and manual calculations is not always necessary. Instead, savvy investors can get a hold of a reliable rental income calculator to get all the numbers and figures they need with a few clicks of a button. Such a calculator will provide not only the estimated income but also the expenses, cash flow, cap rate, and cash on cash return.

Whether you consider investing in a long term or short term rental property, our tools will give you the real estate and rental data and analytics you need to make confident, comfortable decisions. With a few clicks of a button, you can estimate the expected rental revenue on hundreds of thousands of properties for sale across the entire US market.

If you’re searching for the best rental property calculator in the US market, sign up for a free 7-day trial of Mashvisor today, followed by 15% off for life.