Projecting potential income on rental properties can be quite tricky at times. This is where a rental property analysis calculator comes in handy.
Table of Contents
- How Do You Calculate the Value of a Rental Property?
- 6 Factors to Consider in Rental Property Analysis
- What Is a Rental Property Calculator?
- Who Should Use the Rental Property Analysis Calculator?
- What Can You Do With the Rental Property Analysis Calculator?
The ability to assess deals is a crucial factor for the success of both experienced and beginner real estate investors. But it’s not just knowing what a subject property’s value is. You also need to know if it will give you a positive cash flow.
When starting a rental property business, you need to know how to evaluate a property’s fair market value and its income-generating potential.
Whether you are assessing an existing property or thinking of purchasing a new one, a comprehensive rental property analysis is crucial. A rental analysis allows you to project ROI on rental property to give you an idea of whether it is a good investment.
In this article, we will not only discuss why rental analysis is important, but we will also give you some tips on how to use Mashvisor for rental property analysis.
How Do You Calculate the Value of a Rental Property?
Rental properties are great investments because they give you a steady way to make money with an appreciating income source. However, before getting into the rental property arena, you need to understand the value of valuation.
Figuring out the value of a rental property is just as important as determining its return on investment. You can’t just go around buying a property that will get you nowhere near your investment costs. It takes more than money to make a proper investment. You need wisdom and the right strategy as well.
4 Ways Investors Determine Value on a Rental Property
There are four common ways investors calculate a rental property’s value.
1. Gross Rent Multiplier (GRM) Approach
The gross rent multiplier is used to determine the income generated by a rental property compared to its price. The GRM approach is helpful for markets where rent rates change quickly.
The formula for the GRM approach is:
GRM = Property Price / Gross Annual Rental Income
Generally, it is better to invest in a property with a lower GRM as it generates a higher gross income relative to its cost. Take note, though, that the GRM approach does not consider operating expenses like repairs, maintenance, property taxes, insurance, and property management. It is why it is best used alongside the next approach.
2. Income Approach
Using the income approach in property valuation is practical for investors because you’re in it to make money off of an investment property.
The income approach, also known as the cap rate approach, is done in two simple steps. First, you calculate the cap rate by subtracting all the operating expenses from a property’s net operating income (NOI) and dividing it by its value.
Cap Rate = NOI / Property Purchase Price
After getting the cap rate, you may now calculate the property’s value using the income approach formula:
Property Value = NOI / Cap Rate
For example, let’s say you buy a property for $150,000 and get an annual rental income of $22,000. It costs you about $9,000 in operating expenses in a year. Your cap rate is:
Cap Rate = $22,000 – $9,000 / $150,000
Cap Rate = $13,000 / $150,000
Cap Rate = 0.086 or 8.7%
To get its valuation based on the income approach:
Property Value = $13,000 / 0.086
Property Value = $151,163
Related: Income Capitalization Approach: A Guide for Real Estate Investors
3. Cost Approach
The cost approach values a rental property based on how much it will cost to rebuild the same property from the ground up. It will depend on several factors, such as square footage, median property price, and depreciation.
For example, a single-family home is 1,500 square feet in size and is relatively new. Assuming that the median price for building a new single-family unit is $150 per square foot. All you need to do is multiply the two numbers to get an idea of what the total cost is.
Cost = 1,500 sq. ft. x $150
Cost = $225,000
Now, if a unit is somehow a little older, you need to factor in depreciation. Let’s take the same numbers above and assume that the property was constructed five years ago. After five years, the lot value is now $10,000. The property’s cost basis will now be $215,000 (new property value – lot value).
Based on the 27.5-year depreciation schedule, the property’s depreciation value over five years is roughly $40,312 ($215,000 Cost Basis / 27.5-year Depreciation Schedule). Given the said figures, the property’s depreciated value is now $174,688 (New Property Value – Depreciation Value).
4. Sales Comparison Approach
Lastly, the sales comparison approach takes into account similar properties that were recently sold in the area. Such similar properties are also known as real estate comparables or real estate comps.
For the sales comparison approach, you only need to get important information about the subject property, such as:
- Property Type
- Square Footage
- Number of Bedrooms and Bathrooms
- Lot Size
- Construction Date
- Recent Update
After obtaining all the information above, you can research estimated property values using a real estate website like Mashvisor. Look for three to five recently sold homes that are similar to the subject property.
You can either get the average sales price to determine the subject property’s value or compare and make the necessary adjustments based on amenities and features you may or may not have.
After looking at the different ways to determine a rental property’s value, it is now time to take note of the important factors involved in analyzing a rental property.
6 Factors to Consider in Rental Property Analysis
Now that we know the different approaches to determining a property’s value, it is equally important to know how to analyze a rental property properly. Keep in mind that you would want to make your investment returns as optimal as possible.
You must first identify the different factors in computing your investment return. Here are some of the factors to consider when doing a return on investment analysis (ROI) for a rental property:
1. Property Type
An investment property could be a multi-family home, single-family home, apartment, duplex, condo, townhouse, etc. Each property type comes with its own advantages and disadvantages, and the ROI analysis will be somewhat unique to each type.
2. Rental Strategy
You can either focus on long-term or short-term rental properties. Short-term rentals can be Airbnb or vacation homes, while long-term rental properties involve long-term tenants. Both strategies can bring a good return, depending on your target market.
Using Mashvisor’s investment property calculator will give you a better insight into a subject property’s potential as a rental business. It will provide you with all the data you need, such as actual rental comps and a side-by-side comparison of traditional and vacation rental data. It lets you see which rental strategy works best for a particular property in a specific area.
3. Rental Income and Cash Flow
Rental income analysis and calculating the cash flow will help real estate investors establish whether or not a real estate investment will be profitable. A cash flow calculator will come in handy here.
4. Vacancy Rate
The vacancy rate is the portion of the year when a real estate investment property does not have tenants. An ideal vacancy rate would be 0%, meaning the rental property is occupied throughout the year. While full occupancy is possible, the possibility of vacancies should be factored in during rental property analysis.
It’s also important to note that a 100% Airbnb occupancy rate is not very realistic and needs to be taken into consideration during an analysis of rental properties.
5. Operating Expenditures
Running a rental property involves recurring costs, such as insurance, utilities, maintenance, and other operational costs. A proper cost analysis will help determine the operating expenditure of the property.
6. Capital Expenditures
Unlike operating costs, capital expenditures refer to costs that arise periodically. For example, physical assets such as equipment or industrial buildings can be considered capital expenditures.
Imagine adding all the above information into spreadsheets in order to complete a full analysis. It’s as difficult as it sounds! The good news is that a rental investment property calculator is one of the real estate investment tools that can make your analysis and decision-making much easier.
What Is a Rental Property Calculator?
Also known as the rental income calculator, the rental property analysis calculator helps potential property owners assess if a rental property is a good investment.
The rental property calculator works using data such as your mortgage rate, your property’s current value, expected monthly rental income, and loan terms. It also includes your down payment, closing costs, renovation costs, and more. Using the said data, the calculator will show your return on investment in the form of cap rate and cash on cash return.
The rental property analysis calculator developed by Mashvisor is the ultimate investment calculator. It is useful for analyzing a wide range of properties, including apartments, condos, single-family homes, and multifamily homes. Here’s what Mashvisor’s calculator looks like:
Mashvisor’s Rental Property Analysis Calculator
Who Should Use the Rental Property Analysis Calculator?
Mashvisor’s rental property calculator is ideal for investors who need to decide whether or not to buy a property. It’s great for both beginner and experienced real estate investors.
However, the rental property analysis calculator is unsuitable for fix-and-flip investors who buy a property to improve it and sell it later for a profit.
Short-term investors are usually not concerned about monthly cash flow or rental income. Instead, they focus on the after-repair value (ARV) and the returns they can make by selling the property fast.
So, while you can still find investment properties on Mashvisor for the fix-and-flip type of real estate investment strategy (like foreclosures, short sales, bank-owned properties, etc.), the calculator is meant for a rental property investment strategy.
Find out how Mashvisor can help you find lucrative properties. Schedule a demo today.
What Can You Do With the Rental Property Analysis Calculator?
Real estate investors can use Mashvisor’s rental property calculator to perform the following aspects of real estate investment analysis:
Conduct a Complete Investment Property Analysis
Mashvisor’s investment calculator uses predictive analysis to offer investors data on traditional and Airbnb rental properties. The calculator makes it easier for real estate investors to analyze investment properties accurately.
In addition, the calculator allows users to select a financing method (mortgage or cash) and adjust figures such as loan amount, interest rate, down payment, and other one-time and ongoing costs.
Related: Investment Property Analysis: Real Estate Investing
Calculate Cash Flow
The cash flow metric shows the amount of profit a real estate investor can anticipate after subtracting all costs from rental income.
Mashvisor’s rental property analysis calculator provides data on rental income and expense estimates. So, you don’t need to worry about gathering the information yourself to calculate the cash flow.
Calculate Cash on Cash Return
Cash on cash (CoC) return is a real estate metric that measures the return on investment based on the initial cash investment. Calculating cash on cash return is easy; simply divide the net operating income (NOI) by the cash invested initially.
For example, if a property is financed using a mortgage with a 15% down payment, the cash on cash return will be calculated based on the down payment and a few other initial fees.
With Mashvisor’s rental property analysis calculator, you can add in all financing expenses and other costs involved in financing an investment property, such as closing costs and commission fees.
Essentially, it works as a cash on cash return calculator and allows you to quickly determine if a rental property will give you a good CoC return.
Calculate Cap Rate
Unlike the cash on cash return, the cap rate calculation does not consider the financing method used to acquire the property. Using a cap rate calculator, you can find the cap rate ratio by dividing the annual net operating income (NOI) of an investment property by its current value.
Calculating the cap rate is very important for comparing an investment property’s price with other comparable units in the area.
With Mashvisor, you don’t need to spend any time calculating the cap rate. Instead, it comes readily calculated for every investment property on the platform. It means you can take a quick look at dozens of properties in one sitting and narrow down your investment options rather quickly based on the cap rate metric.
Related: What’s a Good Cap Rate for Investment Properties?
Perform a Neighborhood Analysis
Mashvisor’s Neighborhood Analysis feature allows real estate investors to compare different neighborhoods concurrently using a heatmap. The data generated includes the rental income for traditional rentals and Airbnb, listing price, cash on cash return, and Airbnb occupancy rate.
Choose the Optimal Rental Strategy for Each Property
In real estate investing, rental strategy plays a major role in determining the profitability of an investment property. Property investors can decide to rent out their properties as Airbnb rentals or traditional rentals. Each strategy comes with its own cap rate, cash on cash return, occupancy rate, expenses, and rental income.
Because Mashvisor’s rental property analysis calculator provides data based on both rental strategies for every property, investors will be able to quickly figure out which one is optimal.
Summing It Up
As far as rental analysis is concerned, real estate investors like you should have a good idea of how valuable it is to take your game to the next level. Valuing a property and projecting its income potential are crucial to the success of rental property investment. At the end of the day, a subject property should generate positive cash flow for you.
Now, you can choose to do it the conventional way of using spreadsheets and calculators, or you can go with one that is faster and more efficient. We recommend the latter, especially using a platform like Mashvisor.
Finding accurate numbers and data is, without a doubt, very important when evaluating investment property. Being able to calculate property performance will help you make better decisions.
Whether you are a beginner or an experienced investor, a rental property analysis calculator is crucial to choosing the most profitable real estate deals. And you should be using only the best rental property calculator.
Mashvisor gives you access to a wide range of highly accurate data that covers almost every real estate market in the US. It also lets you search for profitable investment properties in a fraction of the time. With tools like a real estate heatmap and a rental property analysis calculator, you can make quicker and wiser investment decisions.
To access Mashvisor’s real estate investment tools, sign up for a 7-day free trial today, followed by 15% off for life.