A few years ago, my husband and I had to decide if we wanted to rent out our home or sell it. To help us make an informed decision, we did the math and the estimated rental income. The results of our calculations helped us see which option was most beneficial for us and from there we became landlords.
Before you purchase your first or next rental property, take a second to run the numbers. If your goal is to generate monthly cash flow, estimate rental income before every purchase. Use this guide to help you do the math and decide if you should rent, buy or ditch the investment.
How To Estimate Rental Income
As a real estate investor, you should do your research about any potential rental property. For example, take note of the purchase price, property value, quality of the neighborhood, and rental prices for other properties in the area. Don’t forget to calculate the vacancy rate, too.
You can use tools or professionals to help you estimate the rental income. Both should give you a sense of what you can expect for monthly rent.
Tools to Estimate Rental Income
Rental calculators do all the math for you. However, to get the best results, you’ll need to input a few facts and figures such as the costs associated with the rental property. If you prefer spreadsheets, Zillow offers a nice rental income and expenses spreadsheet you can download.
Here is a list of factors you should consider when estimating income from a rental property:
- Vacancy Rate: The vacancy rate is the percentage of time your property is expected to be without a tenant. A high vacancy rate determines how well a property is renting.
- Current Property Value: A rental property’s current value is how much the property is worth. Your purchase price and the current value should not be the same. Hire a professional appraiser to get the best estimate of the property’s value.
- Total Cash Investment: The amount you plan to pay for the property, including the down payment and renovations, equals the total cash investment. Figure out these amounts before purchasing the property because they impact the return on your investment.
- Closing Costs: Closing costs are the fees for the lender (if you get a mortgage), attorney, and any costs for the real estate agents for the buyer and seller. They can also include costs for the title search and property transfer. Estimate the closing costs to be two to five percent of the total purchase price.
- Mortgage Rate: The interest rate for the loan used to finance a property is the mortgage rate. Your mortgage payment should include the principal and interest amount plus real estate taxes and homeowners’ insurance, unless you decide to pay these expenses separately.
- Loan Term: The loan term is the length of time on the loan. Some rental property loans range from 10-30 years. Use this number when calculating operating costs.
- Other Expenses: Don’t forget to think about the other expenses you’ll pay for your rental property. These expenses could include homeowner association fees, parking permits, and any other costs associated with the rental property.
Once you gather all of these costs, you can use a rental calculator or the Zillow spreadsheet to help you determine if purchasing the property and renting it out is worth it.
Hire a Professional to Estimate Rental Income for a Rental Property
Real estate agents and property managers who are familiar with the neighborhood of your rental property can also help you estimate the income that can be generated for the property. As professionals, they know the area well and can help you find a renter.
However, it’s important to understand that hiring a professional will be another expense for you. Make sure to ask what the services will cost. For example, some agents and property managers will ask for a fee or percentage of the first month’s rent.
Professionals can be very helpful and provide advice about the rental property, which positions you to demand the most rent from potential renters. For example, they may suggest what items to renovate and what items to keep as is based on the expectations of potential renters.
To help estimate the income from a rental property, realtors and property managers may compare your rental to those in the neighborhood. By comparing your property to the similar properties in the area you can get a solid range on what actual tenants are paying to live there.
Finally, a good real estate agent or a property manager has a strong network, which can get your place rented faster. Professionals may also have the team and resources you need to vet tenants so you can select the most qualified renter.
Search Websites to Estimate Rental Income for a Rental Property
On each website, do a search for properties in your neighborhood and compare what’s being advertised to the property you plan to rent. Your search results will give you a sense of what you could also ask for from potential tenants. You can also take note of the photos used to select the best images to showcase your property.
Remember, the best way to spark interest in your rental property is to display attractive photos and a competitive rental rate to the public. Then, check out Zillow’s rental calculator for your estimated rental income.
What is a Good Return on Investment for a Rental Property?
The return on investment (ROI) on a rental property is the amount of profit you will get as a real estate investor. This amount can vary depending on your investment goals, but you can try to fall within a particular range.
Most real estate investors seek an ROI between five and ten percent on rental properties. However, if you can earn more than a ten percent profit then you can feel confident that you have a great investment opportunity.
To calculate the ROI on a rental property, use the equation below. To calculate the percentage ROI, take the net profit, or net gain, on the investment, and divide it by the original cost.
ROI = Gain on Investment – Cost of Investment
Cost of Investment
Raising the Rent
After you rent your real estate investment property, raising the rent is one way to increase your profits. You can decide to raise the rent if your expenses such as property taxes, homeowners association fees, maintenance or homeowners insurance increase.
Alternatively, you can raise the rent when local market rates increase. This is normally a sign that your neighborhood is becoming more popular and has appreciated in value. Appreciation is a landlord’s dream.
The best time to raise the rent is in between tenants or when negotiating a new lease. If you are raising the rent with a tenant already in the property, it’s customary to only raise the rent about two percent. However, if you are putting the rental property on the market, you can raise it much more according to the going market’s rates.
If, for some reason, you are not able to find a new tenant, you may want to do your research and see what distinguishes your rental property from others available. Then consider lowering your rental price. If your rental price is not the issue, look at your rental terms.
For example, instead of a two-year lease offer a one year lease. Or if you are really having difficulty finding a renter, think about short term leases (think AirBnB rental) or offer a discount on the first month’s rent.
Don’t forget to make sure your budget for the rental property can handle the discounts or price changes. Remember, the goal is to cover all your expenses and make a profit.
Now that you’ve read the guide, go get your passive income! Multiple streams of income are a great way to build wealth, pay off debt and establish the foundation of your real estate empire.
Make sure you set goals for yourself and your money. Decide before you buy your first rental property if you want to reinvest the money into more properties or another business venture. Having goals for your money helps you stay focused.
Are you interested in investing in real estate? Check out these articles to help you get started.
Acquania Escarne is the creator of The Purpose of Money, a community of women building generational wealth for their families one dollar at a time. As an entrepreneur, real estate investor, and licensed insurance agent, Acquania has always been passionate about financial literacy. On her website, Acquania blogs about ways to help you improve your money habits, create wealth, and invest in real estate. Follow Acquania on social media for daily tips.