Quickly & Accurately Forecast ROI With This Real Estate Rental Calculator

Do you want to forecast the returns you can get from an investment property? Find out why you need an ROI calculator real estate rental.

Table of Contents

1. How Do You Calculate Rental Real Estate Return?
2. What Is a Good ROI Rate for a Rental Property?
3. Why Mashvisor Is the Best Real Estate Rental Calculator Available Online

Investing in real estate remains a surefire way of building wealth and creating a consistent source of income. The industry continues to attract investors looking to invest in both long-term rentals and short-term vacation properties.

While the idea of investing and earning returns without lifting a finger is attractive, it isn’t enough. It will help if you carry out thorough analyses before investing your hard-earned cash. It is the only way to be certain that your investment will indeed generate the desired returns.

The accuracy and reliability needed when carrying out such analyses make it hard to carry them out manually. In addition, there’s a large amount of data needed when carrying out the calculations. It is why you need to use a real estate ROI calculator.

In today’s blog post, we’ll help you understand why you need to use such a tool, what data you analyze while using it, and why Mashvisor’s real estate rental calculator is the best there is.

How Do You Calculate Rental Real Estate Return?

Before using an ROI calculator real estate rental to calculate rental property returns, you first need to understand your investment goals and priorities. Answering one question can help you define your goals: Am I investing for cash flow or property value appreciation?

Most people will say that they want both. However, once you start investing, the reality dawns on you. It’s pretty hard to achieve both high cash flow and high property appreciation from a single investment. While it’s not entirely impossible, properties with a high cash flow often come with a lower appreciation rate. The opposite is also true; properties with a high appreciation rate often offer a lower cash flow.

It is because rental rates in well-performing housing markets don’t increase at the same rate as the value appreciation.

That said, how do you actually calculate the real estate return? There are two main ways to calculate a rental property’s return on investment:

The Cost Method

The cost method involves dividing a real estate property’s investment gain by its initial costs.

For example, suppose you bought a property for $120,000 in cash. You make several repairs and renovations amounting to $40,000. After the upgrades, the property is now valued at $200,000. Following the cost method, your ROI calculations will look like below:

Property Costs = $120,000 + $40,000

Property Gain = $80,000 (Market Value Gain) – $40,000 (Repair/Costs)

ROI = $40,000 / $160,000

ROI = 0.25 or 25%

The Out-of-Pocket Method

Many investors love using the out-of-pocket method since it gives a higher ROI. You take the current property equity and divide it by the current market value. Compared to the previous method, you divide the equity (not investment gain) by the market value (not property costs).

Let’s perform a simple calculation using the same example above, only that this time, you financed the investment and put down a down payment of $20,000. In this case, the out-of-pocket expense is the $20,000 down payment plus the $40,000 repairs costs. It amounts to $60,000.

Assuming the real estate property’s current market value is still $200,000, your equity in the home is $140,000.

As such, your ROI calculations using the out-of-pocket method will look like the following:

ROI = $140,000 / $200,000

ROI = 0.7 or 70%

As you can see, the results from out-of-pocket method are almost triple the previous method’s results. The main difference here can be attributed to the investor’s ability to leverage the mortgage or property financing to boost their ROI.

What Is a Good ROI Rate for a Rental Property?

Before you answer the question, you must also know that ROI is also a measure of risk. A higher ROI means that your risk is also higher. As such, properties with the highest return rate may not necessarily be the best investment options, based on your risk tolerance.

Investors who are risk-averse are comfortable with a lower rate of return. This is why it’s wise to stick to an ideal return rate range from an ROI calculator real estate rental.

However, asking around may only leave you confused, especially if you’re a beginner investor. Every investor adheres to their own version of what a good real estate rental property ROI is. There’s no one-size-fits-all answer because an optimal return rate is dependent on several factors. The factors include location, level of risk, property type, and many other factors.

Ultimately, a good return on investment for a rental property depends on your financing method. As we’ve seen from the two calculation methods in the previous sections, obtaining a rental property investment in cash offers a different rate of return from financing the investments using a mortgage.

Investors who’ve accumulated adequate resources may choose to buy the rental property in cash. However, savvy investors know that financing a rental property investment with a mortgage offers a higher return on investment.

In addition to reducing their initial investment, taking out a mortgage also allows them to leverage and grow their investment portfolio. They can invest in more rental properties faster than they would’ve done if they invested using cash.

Now that we’ve placed the said factors into perspective, let’s look at what a good rate of return means for different financing methods.

Optimal ROI Rate for Rental Properties Bought Using Cash

If you’re purchasing the rental property using cash, you need to calculate the return rate using the cap rate metric. Cap rate refers to the capitalization rate. It’s the ratio of the investment property’s net operating income (NOI) to its market value.

The cap rate formula is as follows:

Cap Rate = (NOI / Market Value) * 100

Where:

• NOI = Rental Income – Rental Expenses

So, what’s a good rate of return based on the cap rate formula?

Many real estate investment experts will say that the optimal cap rate for a rental property is 4%. However, don’t forget that the figure is subjective. It varies depending on location, property type, and several other factors.

The cap rate ROI metric is mainly used to compare different real estate property listings. However, you need to ensure that the properties are in the same location and are similar in property type, square footage, and number of bedrooms/bathrooms. Ensure the properties you’re comparing are as similar as possible.

Generally, comparing a property’s cap rate to other cap rates of similar properties within the same neighborhood will tell you if it’s a good investment opportunity or not.

Optimal ROI Rate for Financed Rental Properties

The ROI metric you use for financed properties is different from that of properties bought using cash. Here, you use the cash on cash return metric. The metric considers the amount of cash you initially invested in the property.

In short, cash on cash (CoC) return calculates the rental property’s return on investment based on the amount of cash you invested in the property. It doesn’t account for the amount that was financed. The metric also offers a bigger picture of the rate of return compared to the cap rate, since it also accounts for the repair costs, financing costs, and any other initial costs paid for in cash.

Here’s the cash on cash return formula:

            Cash on Cash Return = Annual Cash Flow Before Tax / Total Cash Invested

The cash flow before tax is simply the NOI minus the financing costs.

So, what’s an ideal rate of return based on the cash on cash return formula?

First, you need to know the cash on cash return rate is often higher than the cap rate due to the low cash invested. The cash invested when calculating the CoC return is usually the down payment, which is usually 20% of the property’s selling price, plus the financing costs. A good cash on cash return is usually higher.

Most experts opine that the best range is between 8% and 12%. However, the said range is also dependent on several factors, such as locations, rental strategy, and market performance. In some markets, the ideal cash on cash return range would be between 3% and 4%.

Why Mashvisor Is the Best Real Estate Rental Calculator Available Online

Mashvisor offers the best ROI calculator real estate rental. Also known as the investment property calculator, the tool helps you find lucrative real estate investment opportunities in the US real estate market.

There are a few things to consider when making a profitable investment. They include investing in a profitable location, spotting a lucrative investment property, and choosing an optimal rental strategy.

Mashvisor’s real estate rental calculator helps you achieve all the above goals. Investors use the tool to spot and analyze profitable property listings, as well as neighborhoods.

The best thing about Mashvisor’s rental calculator is how easy it is to use. You’re only required to enter some basic information based on your investment criteria, and the tool picks everything from there. You don’t need to worry about data accuracy since the tool pulls its information from reliable sources. It’s also fast, therefore, saving you a lot of time and effort.

That said, let’s look at some of the reasons why the Mashvisor real estate rental calculator is the best tool on the internet.

Neighborhood Analysis

Location is the pillar behind any successful real estate investment. It determines how much rent you can charge for your rental properties and your property’s occupancy rate, as well as how much money you spend on property expenses. It is why you need to carry out an in-depth real estate market analysis to spot the best neighborhoods for investment.

Finding the best cities for investment online isn’t hard since the different resources on the Mashvisor platform provide all the information you need. However, it is just the first step in making an informed decision. You need to narrow down your search to a specific neighborhood in the city of your choice.

Investments of the same property type but located in different neighborhoods in the same city can provide different occupancy rates, cap rates, cash on cash returns, and cash flows.

Real Estate Heatmap

The Mashvisor real estate rental calculator helps you spot the best neighborhood that matches your investment budget and strategy. The tool is easy to use since you can conduct a comprehensive neighborhood analysis with just the click of a button.

To start your neighborhood analysis, you need to use Mashvisor’s heatmap. The tool uses different color codes to represent the performance of the neighborhoods in any choice. The performance is based on different metrics, such as listing price, traditional and Airbnb rental income, traditional and Airbnb cash on cash return, and Airbnb occupancy rate.

Once you’ve spotted some well-performing neighborhoods, it’s time to use the Mashvisor investment property calculator for a more in-depth analysis. The Neighborhood Analytics page provides you with the following neighborhood-level data and analytics:

• Median price
• Price per square foot
• Airbnb and traditional rental income
• Airbnb and traditional cash on cash return
• Airbnb occupancy rate
• Ideal number of bedrooms
• Ideal rental strategy
• Ideal property type
• Real estate comps

The best thing about our tool is that it provides analytics for both traditional and Airbnb rental strategies. Most of our competitor tools only focus on just one rental strategy. In addition, our calculator allows you to choose the optimal rental strategy based on the date we provide.

The investment property calculator also allows you to download a report of all neighborhoods you’re analyzing in Excel format. The report contains all property listings in a neighborhood and their stats to make listings comparison easier. You can share the report with your agent, investment partners, or family before making an investment decision.

Investment Property Analysis

By now, you have a list of a few potential investment neighborhoods. It’s now time to look for a few rental properties to buy. Doing so requires you to analyze a number of property listings to determine which of them is most worthy.

The best thing here is that you already know the optimal property type, rental strategy, and number of bedrooms. You can focus your search on properties that meet your criteria.

Mashvisor provides the best tool for your investment property search. The Property Finder will help you search for properties that meet your requirements in the neighborhood of your choice. It ranks the listings based on performance. In short, the best-performing listings appear at the top of the search results.

With your search results, the next thing to do is run a comprehensive analysis of each listing using the investment property calculator. The tool will provide you with the following statistics for each property listing:

Rental Income

You can use our investment property calculator as a rental income calculator since it also provides rental income estimates. Estimating rental income in a certain neighborhood is a time-intensive activity. Our tool readily provides such estimates for both traditional and Airbnb rental strategies.

Rental Expenses

Most investors commit the serious mistake of forgetting to calculate the monthly and startup expenses they need to settle for their investment properties. The monthly costs are vital when estimating your monthly cash flow, while the startup costs will help you calculate the initial investment required.

The startup costs include:

• Closing fees
• Home inspection
• Home repair
• Furniture and appliances

The monthly rental property expenses include:

• Property taxes
• Property insurance
• Property management fees
• HOA dues
• Maintenance
• Utilities
• Marketing

Cash Flow

After obtaining your rental income and expense estimates, it’s much easier to calculate the property’s cash flow. The Mashvisor rental property calculator also readily provides cash flow estimates. If you’re a newbie investor, ensure you only invest in positive cash flow properties.

Return on Investment

One of the main reasons why investors carry out investment property analyses is so that they can determine a property’s profit potential. The profit potential is indicated by the return on investment. The main ROI metrics are cash on cash return and cap rate.

As we saw from the rate of return formulas above, the calculations are hard to do manually. A small error could throw the whole calculation’s accuracy into disarray. However, you can rely on Mashvisor’s investment property calculator to provide you with reliable ROI estimates.

The tool also comes with an integrated investment property mortgage calculator. It’s an interactive tool that allows you to see a property’s cap rate and cash on cash return based on the property and mortgage details you enter.

The property details include property purchase price, loan principal, loan term, mortgage type, down payment, and interest rate. The tool then uses the said information to determine the ROI of the investment property.

You can also enter or adjust the property’s recurring expenses on the investment property calculator to see how the changes would affect the ROI. The calculator provides you with average estimates for property expenses based on the market’s historical data and predictive analytics.

It takes a huge burden off your shoulders. You don’t need to gather the data for any property you wish to analyze. It saves you a lot of time and makes the whole process easier for beginners.

Optimal Rental Strategy

As we mentioned previously, our rental property calculator provides data and estimates for both traditional and Airbnb rental strategies. It helps you to easily compare and choose the optimal strategy for your investment and cash flow goals.

Such a feature is especially useful now, given the continuously growing popularity of the Airbnb rental strategy for investors. It helps you take advantage of the high-profit potential for the ideal rental strategy in your neighborhood while mitigating the risks associated with each strategy.

Occupancy Rate

Rental property demand is measured using the occupancy rate metric. Property demand is another vital factor that influences your rental income and ROI.

However, estimating the measure of property demand isn’t that straightforward since you must consider factors such as location, current market conditions, property type, your marketing strategy and skills, and many others.

Our rental property calculator provides you with accurate and reliable occupancy rate estimates based on the performance of real estate comps.

Real Estate Comps

Investors need to also analyze and compare similar properties within the same neighborhood. Such similar and comparable properties are what we refer to as real estate comps. Looking at real estate comps data helps you determine whether you’re paying the right price for your investment property.

Our investment property calculator provides you with real estate comps for you to compare. You also get more details about them so that you can conduct a comparative analysis.

Final Thoughts

Calculating a property’s ROI is a key step in determining whether an investment property is profitable. Carrying out in-depth neighborhood and investment property analyses will help you find lucrative investment properties.

Mashvisor’s ROI calculator real estate rental helps to spot the best neighborhoods for investment and also search for and analyze profitable investment properties for sale in the US housing market.

Mashvisor’s tool provides valuable insights to help you make informed investment decisions. If you’ve been hesitant about investing in real estate, our tools are the key to helping you mitigate your investment risk.

Start out your 7-day free trial with Mashvisor now.