You are in the business because you have probably heard of many success stories of real estate investors capping big returns on their investment properties. When buying your first rental property, you want to be as assiduous as you can so as to generate the most profit and follow in their footsteps. So you try to be diligent when it comes to finding the right property, assessing the costs, and marketing your rental property to tenants.
But how much profit should you make on a rental property? What is a good return on investment? What are the rental property expenses that you should be accounting for? How much should you charge for rent? We will touch on these concerns associated with real estate investing for beginner investors.
However, before we jump into it, you need to know that there is no concrete answer to the question “how much profit should you make on a rental property?” Assessing the profit of your rental property is dependent on various variables, including the rental strategy, the type of investment property, and even the location. However, when you follow the guidelines we are proposing in this article, you will be able to determine the profit that you should make from your first rental property according to your goals.
Conduct a Thorough Real Estate Market Analysis
Achieving a high return on your first rental property requires deftness in analyzing the market and the neighborhood. As a matter of fact, the research that you do will give you the green light to proceed. You should certainly learn about the market and the competition. What rental strategy should you adopt so as to meet the demand? How much profit should you make on a rental property in that area?
One way of finding out about the local market is by using Mashvisor’s Heatmap Analysis Tool as it will allow you to assess the profitability of a neighborhood through metrics like cash on cash return and rental income. That way, you’ll have a good idea of what a rental property will make in that location.
Related: Neighborhood Analysis in Real Estate Investing
Determine the Monthly Cash Flow from Rental Income
Assessing the cash flow from a rental property is one way to determine the property’s potential for profit. As mentioned, the cash flow that you should be expecting from your rental property will depend on you, the property, the location, and, of course, market demand.
What Is Cash Flow? And How Do You Achieve a Positive Cash Flow?
Cash flow is the byproduct of owning a rental property while renting it out to tenants and receiving a rental income. As a new real estate investor, you always want to have a positive cash flow where rental income exceeds rental property expenses. Of course, you also want to take into account tax deductions and depreciation for a positive cash flow property. Note that a rental property might have a negative cash flow and that happens when the incurred costs are higher than the rental income.
Let’s say, for example, you want to earn $200 a month on a rental property valued at $75,000. To achieve this number, add all the expenses and add $200 in profit to the final number to figure out your rental rate. The expenses that you will incur should include the following:
- Monthly Mortgage Payments
- Property Taxes
- Homeowners Insurance
- Maintenance Costs
- Other fees include accounting fees, property management fees (if looking to hire professional management companies) and advertising fees.
To avoid obtaining a negative cash flow, you want to ensure that you correctly and accurately account for all expenses. Contact your local city council to inquire about fees associated with property taxes and other real estate taxes. Local real estate agents, landlords, property managers and even online real estate investment tools can help you figure out the rest.
Now, wait a minute. Before listing your property for rent, you should assess the rate at which other rental properties with similar characteristics are being rented for in your area. The demand within your area can be high driving rent up and vis-à-vis allowing you to charge a higher rent and achieve higher returns. To help you assess rent of other similar properties within your area, get started with Mashvisor’s Rental Property Calculator. And that’s not all it can do!
Mashvisor’s Tools Will Help You Determine Profitability
Mashvisor’s Rental Property Calculator allows you to search for investment properties within an area based on your search criteria. Once you find an option, the rental property listing will have a list of ready-to-go rental comps. Buying your first rental property and assessing its profitability can be challenging. However, with Mashvisor’s tools, investing in real estate has become easier. You can learn more about this by reading How to Easily Find Real Estate Comps.
To learn more about how we will help you make faster and smarter real estate investment decisions, click here.
Moreover, Mashvisor’s Calculator can help you further determine the cash flow of your first rental property. Mashvisor’s Rental Property Calculator provides real estate investors with cash flow details after accounting for all expenses. The rental property calculator, moreover, will calculate the capitalization rate and cash on cash return of a rental property or properties within a location. This is the next step in determining how much you should make.
Calculate the Returns
The next step to figuring out how much profit should you make on a rental property is calculating the return on investment. When buying your first rental property, it is crucial that you assess its returns. Besides cash flow, this includes the capitalization rate (cap rate), and cash on cash return.
Cap Rate
The cap rate is a common metric used to calculate an investment property’s returns and determine the amount of profit the property will generate. Here is the cap rate formula:
Cap Rate = (Cash Flow/Property’s Value) x 100
Please note that this formula calculates the profit you will be making without accounting for the means of financing (whether using equity or loans).
Cash on Cash Return
The cash on cash (CoC) return, on the other hand, only takes into account the amount of actual cash invested in the property. This means that this rate will be indicative of the amount of profit you will be making from your real estate rental property as a percentage of the cash you have invested in it.
Cash on Cash Return = Annual Income/ Total Dollar Investment
Using the aforementioned returns, you will be able to better assess the profitability of your first rental property. These metrics will help you define and set the amount of rent to charge so as to achieve a good return on investment. As we have mentioned earlier, you can use Mashvisor’s Rental Property Calculator to get these rates. The calculator will derive more accurate results than if you were to manually calculate them.
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Related: What Is a Good Return on Real Estate Investment?
To sum up, investing in rental properties requires that you estimate profitability metrics, conduct a thorough investment property analysis, and budget well. To learn more about anything real estate, delve into Mashvisor’s real estate investment blog!