Rental property investments involve several property valuation, operation, and profitability calculations for success. Not only is the investor working with the value of a home in the current market, but also its value as a rental, expenses of rental property ownership, cash flow, and tax calculations. Nine common rental property investment calculations help keep the rental investor or property manager on track for profits and success in the rental business while being fully aware of their property metrics at any stage of the game.
Let’s get into these important rental property calculations:
#1-RENTAL PROPERTY INVESTMENT CALCULATION FOR GROSS POTENTIAL INCOME
The GPI, Gross Potential Income, of a rental property, is a simple calculation, as the result is simply the annual income expected if the property rents for the entire year without vacancy or losses due to non-payment of rent (credit loss). As an example, a single-family rental property investment is renting for $1,250/month, so the calculation looks like this:
GPI = Monthly Rent Amount X 12 months
Gross Potential Income = $1,250 X 12 = $15,000
That is the potential income from the property, but the losses due to vacancy periods and credit losses must be considered as well.
#2-RENTAL PROPERTY INVESTMENT CALCULATION FOR GROSS OPERATING INCOME
The income that the investor must work from for their rental property investment is lower if there are any vacancy periods or losses due to non-payment of rent during the year. The GOI, Gross Operating Income, is the GPI minus anticipated vacancy and credit losses, or the actual losses at the end of the year.
The calculation looks like this:
GOI = GPI – (Vacancy + Credit Loss)
Rental home investors start out by estimating their vacancy and credit losses. These numbers can vary a lot, especially when one investor is doing a much better job of vetting tenants and their rental payment histories. Also, vacancies can occur through no fault of the investor or the tenant. There are estimates around the Web for these numbers, but 7% to 10% of the total rents or GPI is common. Of course, once you own a rental property investment for a while, you will have your own historical number from operations.
If using 8% for an estimate for the total of vacancy and credit loss of the property in the GPI example, the calculation would be:
Gross Operating Income = $15,000 – $1,200 (8%) = $13,800
This is the amount of money expected from rents that is usable for operating expenses and hopefully profit and positive cash flow.
#3-RENTAL PROPERTY INVESTMENT CALCULATION FOR GROSS RENT MULTIPLIER
Active rental property investors often have several properties on their radar, and the GRM, Gross Rent Multiplier, is an easy way to do a quick comparison to rank the properties to check out the best first. It is not a precise measurement of viability, but it does help investors to zero in on the best properties. It is a comparison tool, and the basic calculation is:
Market Value / Annual Gross Income = GRM, Gross Rent Multiplier
Turning it around is how properties for sale are compared as potential rental property investments.
GRM x Annual Gross Income = Market Value
This calculation is used to quickly compare rental property investment opportunities based on their for-sale list price. It compares the prices as they relate to income, and the lower the GRM the better the property looks as an investment. To use it, the investor gets local rental property sold data, usually from a local real estate agent. Then the sold prices are divided by their annual gross rental income and the results are averaged for multiple properties.
As an example, suppose several recently sold rent homes had an average GRM of 9.5. This was the average of their sold prices (market value) divided by their gross income. Now the investor can use that GRM to evaluate the properties on their radar. Suppose one of the properties is listed for sale at $209,000. It is currently in rental service or a solid estimate of the monthly rent it will justify shows that the annual gross income would be $18,000.
GRM x Annual Gross Income = Market Value
9.5 x $18,000 = $171,000
It is easy to see that compared to the average GRMs in the area for recent sales, this property should be listed for somewhere around that $171,000. At $209,000, this home is overpriced compared to the market. In using this calculation to quickly compare a list of potential real estate investment properties, the investor can find one or more better suited for more in-depth investigation.
#4-RENTAL PROPERTY INVESTMENT CALCULATION FOR NET OPERATING INCOME
The NOI, Net Operating Income, is the income left after the expenses of operation are deducted from the GOI, Gross Operating Income. Operating expenses include marketing, management, maintenance, real estate taxes, utilities, etc. They do not include depreciation or depreciable project expenses. The calculation looks like this:
GOI – (Total Operating Expenses) = NOI, Net Operating Income
Investors compare NOI numbers for different potential rental property investments, but they must also look at expenses and rents. A low NOI number may just mean that either the current owner is not charging as much for rent as they should or that they have abnormally high expenses.
#5-RENTAL PROPERTY INVESTMENT CALCULATION FOR RENT-TO-COST RATIO
This is a simple calculation used by single family rental property investors to compare their property to other rentals in the area. By checking other rental properties in the area, using their current market values or listed sale prices, and dividing the monthly rent by the price or value, it can help the investor to value their rental property investment home or to see if their rent is in line with similar properties in the area. The calculation looks like this:
Rent / Price, Cost, or Value = Rent-to-Cost Ratio
Using an example home that a rental investor bought for $149,000 and the tenant is paying $1,200/month in rent, the calculation is:
$1,400 / $135,000 = .0104 or 1.04% Rent-to-Cost Ratio
Whether this is good or not is relative to the marketplace, the current return on the investment, and the cash flow. It is a good way to compare a rental property investment with others in the area to see if the rent is in line or perhaps should be raised or lowered.
These five calculations are just a few of the many that investors use to value their rental property investments. They help investors to evaluate properties for success in rental property investment.
For more information on investment properties click here
Landon is the founder of Goodjuju; a marketing and SEO firm that helps with property management companies with their websites and SEO campaigns to get more clients online
Copyright©2020 Geneva Financial, LLC, NMLS #42056
This is not a commitment to make a loan. Loans are subject to borrower qualifications, including income, property evaluation, sufficient equity in the home to meet LTV requirements for refinances, and final credit approval. Not all applicants will qualify. Approvals are subject to underwriting guidelines, interest rates, and program guidelines, and are subject to change without notice based on applicant’s eligibility and market conditions. Geneva Financial LLC is not acting on behalf of or at the direction of HUD/FHA or the Federal Government. Geneva Financial LLC is approved to participate in FHA programs but the products and services performed by Geneva Financial LLC are not coming directly from HUD or FHA. Geneva Financial LLC NMLS #42056 is an Equal Opportunity Lender and Equal Housing Lender. 180 S Arizona Ave Ste 310 Chandler, AZ 85225. 1-888-889-0009. AZ BK #0910215
