The rental potential calculator has proven to be one of the best real estate investing tools. Therefore, keep reading to learn how can you use it to buy investment properties.
When buying a rental property, you can’t just pick one randomly and expect it to generate wealth for you. It takes much more to actually buy a profitable investment property. Only then making money will be a piece of cake for you.
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With that being said, there are a few things that play a major role in successful investment choices. One of them is the tools that you choose to work with. That is exactly why successful real estate investors choose to use the rental potential calculator. So, what is so good about the rental potential calculator? Moreover, how can you use it for buying a rental property that is profitable?
What is so good about the rental potential calculator?
The best overall feature of a rental potential calculator is that it’s advanced. Compared to old calculation methods such as the investment property spreadsheet, the rental potential calculator does the following:
It saves you time and energy
In order for you to make money, you will need to work with efficient real estate investing tools that do the work as fast and as effortlessly as possible. Real estate technology has developed so much that it does not require much time to perform calculations anymore. It also does not require the efforts real estate investors used to put into that before the rental potential calculator was invented.
It is accurate
The primary goal of any real estate calculations is to actually come up with accurate figures. This is important as it is the determinant factor of a business’s success or failure. That is, in fact, the main reason the rental potential calculator is there: to tell you exactly what it takes to have profitable investment properties.
It eliminates errors
Even though there are manual ways to perform such calculations, the possibility of an error is much higher than when you use a rental potential calculator. Not only that, but manual tools multiply the errors in further calculations.
How can you use a rental potential calculator to buy investment properties?
A rental potential calculator is a tool that performs property evaluation through different methods. Here are the vital evaluation methods of an investment property:
Related: The Beginner’s Guide to Rental Property Analysis
Calculating cash on cash return
The CoC return is one of the vital real estate metrics for estimating the rate of return on an investment property. It is a very simple formula; however, it might get complicated when one of the variables is missing. In situations like this, the rental potential calculator comes in handy.
The formula for the CoC return is the following:
Cash on cash return = Net operating income/Cash invested x 100
As for the net operating income, it is the annual cash flow that your investment property generates, while the cash invested is the actual amount of cash you have put into the property. To break it down for you, here is an example:
John bought a rental property that is worth $200,000. He got approved for a mortgage and had to put 25% in down payment ($50,000). Therefore, the bank has funded him with $150,000. Moreover, the closing costs were $5,000 in total. As for the NOI, the property generates $20,000 annually. So, in this case, what is the CoC of the property?
$20,000 (NOI)/$50,000 + $5000 (the cash invested) x 100 = 36%
Notice that we only calculated the money that John has paid himself regardless of the mortgage money. That is exactly how it is calculated. The good thing about the cash on cash return is that it gives an accurate rate of return on an investment property.
Calculating capitalization rate
The cap rate is another important real estate metric to estimate the return on investment for a property. Though it is similar to the CoC return, it calculates the return on investment regardless of the investment property financing. In other words, you divide the NOI by the overall market value of the investment property. It is a general metric and is the favorite evaluation method for commercial real estate investors. It gives them a quick speculation of a property’s profitability.
The cap rate in action
Let us take the previous example with John. You will have to apply the previous figures to the formula, except for the cash invested. Instead, we are going to use the total value of the property:
Cap rate = Net operating income/Market value of the property x 100
Cap rate = $20,000/$200,000 x 100 = 10%
This means that John experiences a 10% return on his investment every year. As for a good capitalization rate, consider anywhere from 8% and above to be a good cap rate.
Note: The cap rate is a metric used to estimate the return on long-term investment strategies. Therefore, if you are investing in short-term strategies such as fix and flips or house wholesaling, you should not be using the cap rate as a property valuation method.
Related: Cap rate vs. Gross Rent Multiplier: Advantages and Disadvantages
Calculating profits or losses
Yet another task that the rental potential calculator is useful for is calculating profits or losses. It calculates your profits or losses by analyzing your rental income. It takes into consideration the cash flow that your rental property produces. Therefore, you can stay on track with your property’s performance.
What you need to understand about the rental potential calculator is that you do not use it only when you are buying a rental property but you will need to use it regularly as long as you own the property.
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Mashvisor’s rental property calculator
When it comes to the best analytics tools, Mashvisor is the leading source. With Mashvisor’s advanced rental potential calculator, you will have access to whatever real estate market data analysis you need. Also, you will have access to neighborhood analysis tools which will help you buy investment properties in the hottest locations. The best investments are only a click away from you. Make sure to check out Mashvisor to find the best real estate investment deals and to use our tools in order to analyze different investment properties.