2 Calculations All Rental Owners Should Know
Two calculations to determine if a rental property is a good investment.
Have you ever thought about investing in a rental property? Real estate investments can be a great way to earn passive income, but you need to be careful. Not all rentals are the same, so you need to know how to identify which ones make sense financially. That can change based on various factors, but the main way to determine if an investment will be a good one is to run the numbers. Whether or not you like math, that step is crucial to finding an excellent real estate investment. However, this is challenging and daunting for many people, so I’m here to simplify it for you.
The first thing you should do is figure out how much your rental income, operating expenses, and mortgage payment would be. There are many calculators online that will help you take a mortgage price and turn that into what your monthly payment would be, and you can talk to a local lender for advice on that. Then you can look at comparables in your area to see how much you should charge for rent, which would be your rental income.
"The main way to determine if an investment will be a good one is to run the numbers."
The trickier part of this is determining what your operating expenses would be. Of course, it’s always possible for unexpected things to pop up, but here is a list of some common expenses: accounting for a vacancy, the fees of a property management company if you want one, leasing fees, repairs, insurance, taxes, utilities, etc. You’ll have to estimate what some of those numbers will be, but there are experts that can help you with this.
This is where the math comes in. I recommend you calculate what your net operating income and cash flow would be. For the first equation, simply subtract your expenses from your rental income, and that’s your net income! Then, take that number and deduct your mortgage payment, and that leaves your cash flow. It’s as easy as that! Plus, there are plenty of online calculators that can help you with all of this.
There are a lot of other calculations you could run, but those are the essential ones. If those two don’t end in a positive number, run away! That property is not the right investment. This topic entails a lot of subjective and confusing things, so I recommend getting advice from an expert, and I would love to help you. If you want my help buying an investment property or even seeing if the investment would be worth it, call or email me! I would be happy to walk you through every step of this process.