When it comes to investing in an income property, a real estate investor must first evaluate its profitability to know if it will be a good investment to buy. If you are new to the real estate investing industry, you may be wondering: How do I know if my investment property is profitable? Well, you can determine a property’s profitability the traditional way, which involves collecting data on the local housing market and the property, preparing spreadsheets using Excel, and then manually calculating the return on investment (ROI). But, you definitely don’t want to put yourself through all of that work!
Related: How to Calculate ROI in Real Estate
The best way to evaluate the performance of an investment property is to use an investment real estate calculator. It will save you so much time and effort when it comes to calculating your returns! Before we go into the details of how to use this tool, let’s first quickly explain what an investment real estate calculator is.
What Is an Investment Real Estate Calculator?
An investment real estate calculator – also known as a real estate investment calculator or real estate return on investment calculator – is an online app that helps property investors assess the profitability of potential real estate investments. Users just need to input some basic data about a certain income property, and then the calculator will automatically calculate all the important real estate metrics needed to evaluate its performance. You can basically think of it as a property evaluator which tells you whether your target property is worth investing in.
So if you’re wondering how to figure out return on investment real estate, this app will answer your question! It will give you an overview of your potential returns so you can carry out your own residential income property analysis. You, therefore, won’t need to use Excel spreadsheets anymore for forecasting ROI.
Related: Why an Investment Property Calculator Is Better Than Spreadsheets
The best investment real estate calculator to use is Mashvisor’s rental property calculator. It can be used to analyze a wide range of properties including single family homes, multi family homes, apartments, and condos. So, let’s see how you can use it to determine the profitability of an investment property.
How to Use Mashvisor’s Investment Real Estate Calculator
Let’s consider that you’ve found an income property for sale on Mashvisor’s website and you want to know if it’s a good investment to buy.
Input Data
Upon accessing Mashvisor’s investment real estate calculator, the first thing you need to do is input data relating to your financing method and property expenses.
1) Financing Method
In the Mortgage Calculator section of the calculator, you must choose the method with which you want to finance your target property: fully with cash or using a mortgage loan. After choosing your financing method, you must enter the property’s purchase price. In case you’re not so sure about your property’s price, you have the possibility to select Mashvisor’s own estimation of the property’s listing price, or even Redfin’s estimated selling price.
If you are financing your investment property with a mortgage loan, you must also insert information relating to the loan, including:
- The loan amount
- The amount of down payment
- The mortgage type (fixed rate mortgage, interest only mortgage, adjustable mortgage)
- The loan term (15 years, 30 years)
- And the interest rate on the mortgage.
As soon as you input all the data above, the investment real estate calculator will automatically compute the ROI of the property. Any changes you make to the numbers will immediately be reflected on the calculator. You can, therefore, adjust and play around with the values to figure out which down payment, mortgage type, and loan amount will maximize the property’s ROI.
2) Property Expenses
In the Expenses section of Mashvisor’s investment real estate calculator, you have to input all the data relating to your subject property’s potential rental expenses. The rental property expenses are broken down into two categories:
- One-time startup costs: these are the costs that real estate investors only pay once when buying an investment property, such as:
- Home inspection
- Repairs and renovations
- Furnishing and appliances expenses
- Closing costs
- Recurring costs: these are the costs that investors have to pay on a regular basis once they own the rental property, such as:
- Property insurance
- Utilities
- Taxes
- Property maintenance
- Property management
- HOA dues
The good news is that Mashvisor’s investment real estate calculator gives you readily-estimated values for all the rental property expenses shown above. The provided estimates are actually based on the average expenses for the neighborhood where the subject property is located. You can still change any values which you believe will be different, based on your own analysis and knowledge. You can also add additional expenses that are specific to the investment property. Once you enter the new values, all the calculations will be updated to show you what ROI to expect.
Output Data
After you’ve input all the data above, Mashvisor’s investment real estate calculator will output the following real estate metrics (in the Rental Strategy section):
1) Rental Income
This is the expected monthly rent, i.e. the amount of money that you are expected to earn every month from renting out the property to tenants. Mashvisor’s investment real estate calculator calculates this number based on data of the rental income to bedroom ratio from other rental properties in the area.
2) Cash Flow
The cash flow is the difference between rental income and rental property expenses. This metric basically tells you how much money you will make (or lose) each month from your investment property after you have paid all your bills. When it comes to buying real estate, you should always make sure to find positive cash flow properties. Positive cash flow indicates that the rental income is higher than the rental expenses, which means that you will be able to realize a profit.
3) Cash on Cash Return
The cash on cash return is one of the most important metrics of ROI in real estate. It tells you how much profit you can expect from the rental property based on the cash you have invested in it. This metric is, therefore, particularly useful if you are considering financing your investment property with a real estate investment loan. Mashvisor’s investment real estate calculator takes into account the cash down payment, as well as all other expenses paid in cash (e.g. closing costs) when calculating the cash on cash return. In real estate investing, rental properties with cash on cash return of at least 8% are considered good investments.
4) Cap Rate
This is another important metric of profitability. The cap rate estimates the returns on your residential real estate investment without taking into account any mortgage payments, but rather by assuming that the cost of the property has been paid off 100% in cash. This gives you an idea of what your investment property is worth and how profitable it is in relation to its value. What is a good rate of return on real estate investments? Real estate experts recommend investing in real estate properties with a cap rate of 10% or higher to ensure a profitable investment.
5) Occupancy Rate
The occupancy rate is the number of days that the property is expected to be rented out per year. This metric is particularly important if you are considering investing in Airbnb (short-term) rentals. Airbnb investors always aim to find rental properties in locations with a high Airbnb occupancy rate throughout the year in order to maximize their rental income. Mashvisor’s investment real estate calculator estimates the occupancy rate of a rental property based on rental data from the area where it is located.
Special Features of Mashvisor’s Investment Real Estate Calculator
Mashvisor’s investment real estate calculator has some unique features that can’t be found in any other calculator.
1) Rental Strategy Overview
Mashvisor’s investment real estate calculator outputs all the real estate metrics mentioned above for both the traditional rental strategy and the Airbnb rental strategy. This means that you will be able to see what your property’s rental income, cash on cash return, cap rate, and occupancy rate will look like for each rental strategy. This will allow you to make quick comparisons between the two strategies and eventually decide which one will bring you a higher ROI on your rental property.
2) Investment Payback Balance
Mashvisor’s calculator allows investors to forecast the profits that they will be making (or losing) from their rental property for up to 10 years in the future. In the Payback Balance section of the calculator, you can see the amount of money that your subject property will have generated over time as a traditional rental and as an Airbnb rental. This will help you to know if your investment property will be generating or costing you money. More importantly, it will give you an idea of how much time it will take for your property to pay back the amount of money invested in it.
3) Real Estate Comps
Mashvisor’s investment real estate calculator provides investors with real estate comps that they can use to perform a real estate market analysis. You can, therefore, utilize the calculator to compare your target property with plenty of other similar properties in the area, which will help you figure out whether or not your property or rental strategy is good for your investment based on your goals as well as how much to pay for the investment property.
Related: Real Estate Comparables: The Best Way to Find Them
4) Insights
Mashvisor’s calculator allows investors to gain useful insights into the neighborhood where the investment property is located as well as the investment potential of the property itself. In the Insights section of the calculator, you will see different stats and scores including:
- An overall evaluation of the neighborhood investment opportunity
- An overall evaluation of the property investment opportunity
- Airbnb occupancy insights
- Rental opportunity insights (Airbnb and Traditional)
Conclusion
The investment real estate calculator is one of the must-have real estate investment tools that you need to be equipped with if you’re considering investing in the US housing market. It’s fairly easy to use, and it will help you carry out a full investment property analysis in a matter of minutes. With this tool, you are guaranteed to make the best real estate investment decisions.
Schedule a demo today of Mashvisor’s real estate calculator with one of our product specialists.