Every for-profit business requires positive Net Operating Income (NOI), including your rental property business. This calculation is used to analyze the profitability of income-generating real estate investments and equals all revenue from the property, minus all necessary operating expenses, excluding mortgage payments. Good property’s rent will cover 100% of operating expenses and leave 50% or more to cover the mortgage and provide profit in your pocket. IT’S ALWAYS ABOUT THE NUMBERS!
CALCULATING YOUR RENTAL PROPERTIES NOI
Before making an offer, I utilize the below rental property calculator to estimate NOI and other Key Performance Indicators {KPI’s}.
I then reevaluate after renting to verify the accuracy of my assumptions.
ESTIMATING RENTAL INCOME
A good Property Manager can estimate the rental income. You can also use a free tool to analyze the average and median rental rates based on the property’s location, size, and property type
If you buy a property with existing tenants, this tool can evaluate if tenants are paying the market rate. You may be able to increase your rent when leases expire.
ESTIMATING VACANCY RATE
Per the U.S. Census Bureau, in 2014, the nationwide average vacancy rate was 7.6%.
Here are two resources to help you estimate the vacancy rate for your specific market:
1. PROPERTY MANAGERS
Ask your property manager or any property managers you are considering hiring to estimate the vacancy rate in the area you are lookingfor. This is a great opportunity to interview a few property managers over the phone while seeking this data.
2. REAL ESTATE AGENTS
If you plan to utilize a real estate agent to fill a vacancy this is another professional to seek their advice and expertise on market vacancy rates. Some agents may be willing to conduct a comparative market analysis using local and area property data. This analysis will show:
- How long currently available properties have been vacant
- Average time properties remain on market before occupancy
- Original listing rental amount versus the actual rented amount
TYPICAL OWNERSHIP COST
- Taxes
- Property insurance (flood insurance may also be required)
- Owner paid utilities: May include water, sewer, electric, gas, garbage pickup, etc.
- Ideally, you want your tenants to pay as many utility costs as possible.
- Homeowners Association (HOA) fees
- Advertising
- Maintenance (the industry average is 1%–3% of the property value),
- Lawn Care
- Property Management
- Lease up fees – Typically charged by Property Managers to vet and select good tenants.
NEXT USE THE RENTAL PROPERTY CALCULATOR – IT’S ALWAYS ABOUT THE NUMBERS!
EXAMPLE PROPERTY DATA
- Paid: $185,000
- Annual Taxes: $1,800
- Annual Insurance: $751
- Home-Owners Association = None
- Property Management Fee: Seven percent/month
- Targeted Rental Revenue: $1,800/month
- Holding Period Prior to Potential Sales: 20 Years
- Value After Repairs – Calculate based on a market analysis of other homes in that area
- Vacancy Rate: (eight percent is one month vacant. I attempt to sign tenants to two-year contracts and use five percent)
- Maintenance Annual Expenses: If recently installed HVAC, new appliances new roof, etc can assume this number will be low in the first few years. (~one percent)
- Other Costs: A miscellaneous cost bucket
- Value Appreciation – Use state, county, and city average value appreciation.
- Holding Length- I use 20 years, as I buy properties for long-term cash flow.
- Cost to Sell: Six percent to real estate agent plus the miscellaneous closing cost of ~ two percent.
Input the above data and assumptions and the calculator generates an estimate of the below key performance indicators (KPIs).
- IRR: The internal rate of return (IRR) is a more exact measurement of a property’s long-term yield.
- Cash-on-cash return: This is often used to evaluate the cash flow from income-producing assets.
- Capitalization rate: The rate of return on a real estate investment property … Capitalization Rate = Net Operating Income / Purchase Price.
20-YEAR RETURNS – IT’S ALWAYS ABOUT THE NUMBERS!
CONCLUSION – IT’S ALWAYS ABOUT THE NUMBERS!
Carefully research your real estate market and only make an offer on properties that meet your income and other financial target requirements. You will pass on properties more often than make an offer. Never fall in love with your properties. A rental property is not your home, but an investment.
After buying a property your job is to manage your properties and achieve targeted ROI by:
- Selecting the right tenants
- Charge market rates
- Keep your property in the condition that gets you top dollar
- Replace your property management firm if not satisfied
PREVIOUS APPLICABLE REAL ESTATE INVESTMENT BLOGS
STEP #1: BUILDING YOUR “A” REAL ESTATE TEAM!
STEP #2: IT’S ALL ABOUT THE LOCATION SILLY
STEP #3: BUYING THE BEST MONEY-MAKING INVESTMENT RENTAL PROPERTIES
https://wealthbuildingpowers.com/2020/09/21/buying-the-best-money-making-investment-rental-properties/
STEP #4: TO FIND A GREAT INVESTMENT REAL ESTATE AGENT YOU SIMPLY NEED…
https://wealthbuildingpowers.com/2020/09/28/to-find-a-great-investment-real-estate-agent-you-simply-need/
STEP #5: IS A PROPERTY MANAGER WORTH TEN PERCENT OF YOUR RENTAL INCOME?
STEP 6: YOU WANT MAX PROFIT, THEN YOU NEED A GREAT PROPERTY MANAGER
https://wealthbuildingpowers.com/2020/10/19/you-want-max-profit-then-you-need-a-great-property-manager/
To Join Wealth Building Powers BLOG:
PLEASE SIGN UP TO FOLLOW ME BY PROVIDING YOUR E-MAIL IN THE WORDPRESS BLOG PAGE SUBSCRIBE BOX!
Thank you to my followers and readers, for your likes and comments. All comments, recommendations, and feedback are welcomed and utilized to improve this blog.
ABOUT ME
I am a proud nerd (as my beautiful wife and daughter have told me) investment and finance blogger, with an N.C. State, Chemical Engineering, University Rutgers, MBA and Harvard University, Advanced Management education.
I left a corporate career because I had a desire for making a difference as a speaker and writer, to help others. I was blessed to be coached and mentored by strong women and men in both my family and professional life. It is my time to serve and give back.
DISCLAIMER
I started my first business at ~13 years of age (a small but brilliantly created plant nursery). I am a successful investor in stocks, options, real estate, and happy to share my finance and investment lessons learned with you.
However, I am NOT a licensed financial advisor. Please do not construe my suggestions on this blog, as recommendations for your situation. For individual finance advice please seek your licensed CPA or fiduciary financial advisors.
I write this weekly blog to make an impact by reaching an audience and demonstrating the need for financial literacy. I will help you get there.