When it comes to investing in rental properties, it’s important to do your due diligence and run the numbers to determine if it’s a viable investment. There are several key factors to consider when evaluating a rental property, including the potential rental income, operating expenses, and return on investment (ROI). In this article, we’ll walk you through the steps of how to run the numbers on a rental property to help you make an informed investment decision.
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The first step in running the numbers on a rental property is to determine the potential rental income. This will give you an idea of how much you can expect to earn from the property each month.
To do this, you’ll need to research the local rental market to determine the average rent for similar properties in the area. You can use online real estate platforms, such as Zillow or Redfin, to get an idea of the going rate for rentals in the area. You can also consult with a local real estate agent or property management company for more accurate and up-to-date information, or simply use RentFund and get our support with figuring this out.
Once you have an idea of the average rent for similar properties, you can use this information to estimate the potential rental income for the property you’re considering. For example, if the average rent for a two-bedroom apartment in the area is $1,500 per month, and the property you’re considering has two bedrooms, you can estimate that it will likely rent for around $1,500 per month.
It’s important to note that the actual rental income may be higher or lower than your estimate, depending on the condition and location of the property, as well as the demand for rentals in the area, if you're in doubt the RentFund team can help you out!
The next step in running the numbers on a rental property is to calculate the operating expenses. Operating expenses are the costs associated with owning and maintaining a rental property, such as property taxes, insurance, utilities, and repairs.
To calculate the operating expenses, you’ll need to gather estimates for each of these costs. You can get estimates for property taxes by contacting the local tax assessor’s office, and you can get estimates for insurance by contacting insurance companies or consulting with a local real estate agent.
Utilities and repairs will vary depending on the age and condition of the property, as well as the usage of the tenants. You can get estimates for these costs by contacting utility companies and contractors in the area.
Once you have estimates for all of the operating expenses, you can add them up to get a total operating expense for the property.
Now that you have an estimate of the potential rental income and the operating expenses, you can calculate the net operating income (NOI) of the property. The NOI is the amount of money you can expect to make from the property after operating expenses are paid.
To calculate the NOI, simply subtract the operating expenses from the potential rental income. For example, if the potential rental income for a property is $1,500 per month and the operating expenses are $500 per month, the NOI would be $1,000 per month ($1,500 - $500).
The NOI is an important factor to consider when evaluating a rental property because it represents the amount of money you can expect to make from the property each month after operating expenses are paid. Most investors calculate this number on an annual basis, if you're having trouble at this stage in the process you can always contact our support team and we can help you define these numbers.
The final step in running the numbers on a rental property is to calculate the return on investment (ROI). The ROI is a measure of the profitability of an investment, and it’s calculated by dividing the net operating income (NOI) by the total cost of the investment.
To calculate the ROI, you’ll need to know the total cost of the investment, which includes the purchase price of the property, closing costs, and any renovations or upgrades you plan to make. You can use online calculators or consult with a financial advisor to help you determine the total cost of the investment.
Once you have the total cost of the investment, you can divide the NOI by the total cost to get the ROI. For example, if the NOI for a property is $1,000 per month and the total cost of the investment is $200,000, the ROI would be 5% ($1,000 / $200,000).
The ROI is an important factor to consider when evaluating a rental property because it will help you determine the profitability of the investment. A higher ROI generally indicates a more profitable investment, while a lower ROI may indicate a less profitable investment.
Running the numbers on a rental property is an important step in the investment process, as it helps you determine the potential profitability of the property. By calculating the potential rental income, operating expenses, NOI, and ROI, you can make an informed decision about whether or not a rental property is a good investment for you.
Remember, it’s important to do your due diligence and thoroughly evaluate all of the factors that can affect the profitability of a rental property. This includes researching the local rental market, consulting with experts, and carefully considering the condition and location of the property. By following these steps, you can make a smart and informed investment decision when it comes to rental properties.
