What do you need to learn about a property before you analyze it using a rental property calculator? A rental property calculator is one of the best tools for analyzing rental properties and learning about the rate of return that they will have before you commit to investing your money in them.
If you’re a beginner real estate investor and you’re just about to begin the journey of investing in rental properties, this article will help you understand how a rental property calculator functions and what information you need to gather about the property in order to fully utilize the tool and get the most accurate results.
What is a Rental Property Calculator and How Does it Function?
A rental property calculator is a digital tool that you can find on several websites and platforms online. The tool allows you to input certain information about the property and your investment strategy, and it will handle all the calculations using unique algorithms in order to give you information about the rate of return on your investment.
There are three main elements of a rental property calculator:
- Your financing information
- The costs and expenses that will incur on the property and on your investment
- The results, which include the ROI metrics, such as the cap rate and the cash on cash return
These three elements work simultaneously to provide the user with the info that they need to base their investment decisions on.
The way the rental property calculator functions is that, once you input the data, it will calculate the different expenses, including the mortgage payments and interest rate, and subtract these expenses from the rental income that the property will generate, and then it will calculate the ROI metrics based on the profits that the property is expected to generate in relation to the property’s price or the amount of money that you’ve invested in it.
To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.
Now, let’s get into more details on each of these elements and see what kind of input you will need to have in order for the rental property calculator to work.
Financing Information
The financing information refers to the method of financing that you want to use for purchasing the property.
There are two options that will be available to you – Cash or mortgage.
If you’re using all cash, this will be a very simple step because the amount of cash that you will have to invest will be identical to the property’s price or the price at which you believe you can purchase the property at after doing the negotiations.
If you’re using a mortgage to finance your investment, then the calculator will have the option to choose from the different types of mortgages, their duration, their amount or the amount of down payment, as well as the interest rate of the mortgage.
Most likely, the rental property calculator will have an innate function to accurately calculate the amount of mortgage payback accounting for the interest rate over the duration of the mortgage in order to include the amount as an expense in the calculations.
Related: Buy a Rental Property Using Mortgage or Cash?
The Costs and Expenses
This element is where you will be required to do some research and gather some data in order to make the calculations more accurate and reliable.
There isn’t a rental property calculator that can function without the inclusion of the costs and expenses in its calculations. This is because these expenses will typically take up a considerable portion of the amount of rental income that the property has, so you can’t get an accurate estimation of the ROI without accounting for them.
There are two main types of expenses that will incur on your investment – one-time startup costs and recurring expenses.
One-time startup costs are the expenses that will only apply once when you first purchase the property, such as the closing costs, installing new furniture and appliances, getting the property inspected, or renovation costs.
The more important part is the recurring expenses. These are the expenses that will apply on a monthly or an annual basis as long as you own the property or run it as an investment property.
The recurring costs include maintenance costs, property management costs, property tax, amenities, HOA fees, and other similar expenses.
Related: 11 Costs First Time Real Estate Investors Should Consider
While it is possible to find a rental property calculator (such as Mashvisor’s, that provides you with the average costs and expenses that will apply to the property based on the area that you’re investing in and the type of property) in most cases you will have to gather this info on your own in order to include it in the calculations.
Additionally, sometimes it isn’t enough to use the area’s averages when doing these calculations as the expenses that will apply to your particular property might be significantly higher or lower than the area’s averages.
For this reason, even when you’re using Mashvisor, when you’ve set your mind on a particular property it is highly advised to gather information on the accurate costs and expenses in order to get the most accurate results and ROI.
To learn more about how we will help you make faster and smarter real estate investment decisions, click here.
The ROI Metrics – Cap Rate & Cash on Cash Return
Once you’ve input all of these values, the rental property calculator will finally take all of the info that you’ve gathered and mash it together using unique formulas and equations in order to give you the results in the form of metrics that will help you understand what your ROI will be.
The main metrics that are used when investing in a rental property are the cap rate and the cash on cash return.
The cap rate is an ROI metric that indicates the amount of profits that the property will generate each year in relation to the total value of the property. So, a property with a cap rate of 10%, for example, will generate annual profits that are equal to 10% of its value and will need 10 years to generate enough profits to cover its price.
The cash on cash return is an ROI metric that indicates the amount of profits the property will generate each year in relation to the amount of cash that you’ve invested in it, leaving out any amount of money borrowed through a mortgage loan. So, a property with a cash on cash return of 20% will generate annual profits that are equal to 20% of the actual amount of cash that you’ve paid for that property, which in most cases will be the down payment plus the one-time startup costs.
Related: Understanding Cap Rate vs Cash on Cash Return
Mashvisor’s Rental Property Calculator
In addition to the cap rate and the cash on cash return, Mashvisor’s calculator will also include the occupancy rate and the comparative rental income to provide the most accurate results that are unique to rental properties.
The comparative rental income will be the main metric used as the source of profit of the rental property, and it refers to the amount of rental income that the property will generate after accounting for its occupancy rate.
For example, if a property has a monthly rent of $1,000, its annual rental income would be $12,000. However, if the property has an occupancy rate of 50%, then the actual (or competitive) rental income would be $6,000.
Mashvisor’s rental property calculator is also unique in that all the calculations will be made for both rental strategies – short-term rentals and long-term rentals. This allows you to see which rental strategy is projected to generate higher returns so that you can easily choose the rental strategy that perfectly matches your investment goals.
Want to learn how to use Mashvisor’s rental property calculator? Click here to view our tool manual and see how it can help you analyze rental properties quickly and with ease.
Also, don’t forget to leave a comment with your thoughts and experience with using a rental property calculator, and let me know if there was anything that I’ve missed or that should be added to Mashvisor’s calculator to make it better and more reliable.
