Knowing how to work the numbers when it comes to a rental property is key to being successful with your investment. If you know how to figure out the potential income of a property, then you know that the investment is either a good one or will be a money pit. Of course, the rental market has its ups and downs but you can still predict your chances by learning how to calculate your return on investment potential.
If you are considering a rental property purchase, then you should calculate the potential return on investment (ROI). This will help you to figure out if you are getting a good deal. When considering the ROI, you need to look at upfront and reoccurring expenses for the property. An initial investment would include the down payment, interest rate, closing costs and any improvements you must make to get the property ready for renters.
The upfront costs such as those listed above along with the ongoing expenses will need to be compared based on the projected rental income. Ongoing expenses would include the mortgage payment, any homeowner’s association fees, taxes and maintenance of the property. In the maintenance category, consider such property needs like a management company. Options like BnB Haven help to ensure your property is successful. Every area in which you pay for your property needs to be included in the estimates for potential rental income.
Consider the Market
Rent should never be set based on covering your expenses. It needs to be based on a fair market value. Do your research and find out how much similar properties in the area are renting for. Consider supply and demand as well. If the demand is high, you may be able to set a higher price point. If the demand is low, you will have to lower your price or consider offering some type of amenity to bring in tenants.
Once you have an estimate of annual income, based on the monthly rent price you choose, then you will be able to deduct the annual expense to figure out your estimated ROI. You can do this on paper or an excel spreadsheet. You can even find rental income calculators online to help you figure the numbers.
If you see that your ROI is moderate to high, then the property is a good investment. If you are cutting it close or even under, then it is not a good time to buy this property. Never invest until you know that you can at least see some type of profit in the near future. Getting into a hot rental market is a great step in the right direction to invest in property that will help you see a profit at a faster rate.
Always consider the estimated ROI before investing in a new rental property. With just a little research, you can decide if a new investment will be beneficial or a time waster. Be smart and make good decisions based on sound research and considerations.