No matter how many rental properties you manage in your portfolio, one thing never changes:
You need to know how profitable your investments are and are going to be.
That comes in all different flavors:
- Calculating your rental income now
- Calculating ROI on your rental properties thus far and into the future
- And calculating if a new property is a good potential investment
Below, we’ll be covering all of that and more.
The goal is to give you absolute clarity about how to calculate rental income and profitability and all factors that go into calculating it no matter what:
- What stage the investment is in, or
- What period of time you’re calculating for.
Let’s start with how to calculate your current rental income.
How to calculate rental income (NOI)
Typically, Net Operating Income is used to get a clear picture of how much rental income a property is generating.
Net Operating Income is a measure of how much income your rental property is generating after expenses.
The exact formula is simple:
First, let’s get your gross rental income.
The calculation is:
Total Monthly Rent Income x 12 = Gross Rental Income
Next, to get total operating expenses, you’ll want to get a full tally of all your property-related expenses.
- Maintenance and repairs
- Insurance costs
- Real estate taxes
- Utility costs (only those paid by you)
Once you have that, just plug everything in and you’ll have your net operating income.
Before we move on to our next calculation, however, keep something in mind:
Net Operating Income can’t give you a full picture of a rental property’s profitability
I know it’s easy to want to call it a day after calculating your NOI.
Everything look good? We’re in the positive on each of our properties by a good margin?
Great! Moving on…
Not so fast.
The truth is that to get an accurate picture of the health of your property, you need to do more than simply calculate your current rental income.
Even within the NOI calculation you should be taking other things into account, such as occupancy rate and projected occupancy rate to get an idea of what your projected future income will be.
By taking every factor into account, you’ll get a much more complete picture of a rental property’s profitability or potential profitability.
How to calculate your return on investment (ROI)
Next, let’s talk about how to calculate return on investment or ROI.
As we talked about, it’s not enough just to know your income on the property, you’ll also want a broader understanding of whether the property itself is profitable.
ROI is perfect for giving you an idea of exactly that.
ROI is calculated as:
Gains refer to the total amount of cash earned from the property.
It takes into consideration all sources. Including:
- Rent payments
- Additional payments such as pet fees, parking, laundry, etc.
Cost refers to the total cost of the investment thus far.
It includes things such as:
- The initial purchase price of the property
- Property taxes
- Insurance costs
- Mortgage interest
It also includes operating expenses, such as:
- Repair and maintenance costs
- Marketing costs
- HOA fees
Together, ROI is essentially a comparison (typically shown as a percentage) between your gains and the total cost of the property.
For example, if you have gains of $100,000 and a cost of $75,000, the equation would look like this:
(100,000 - 75,000) / 75,000 = ROI
25,000 / 75,000 = 0.33
Shown as a percentage, that would be 33% ROI.
What should the ROI be on your rental property?
Having said that, what kind of ROI should you look for in your rental properties?
Some sources online will tell you that you can look at things like the median net income on rent.
However, the truth is if you want an accurate answer, you’ll want to look at a variety of factors that have as much to do with your local market as with the property itself.
Some factors to consider when figuring out what your ideal ROI should be include:
- Property purchase price
- Total expenses to date
- Average rent in your market
- Occupancy level
- And general market conditions
To get an accurate estimate of the return you should be seeing on your property, it can be helpful to hire a property manager who has the capability to run market research.
They’ll give you the market-related information you need to get a closer estimate than what you otherwise could get on your own.
How to calculate if a property is a good potential investment
So far, we’ve talked about two accounting tools:
- Net Operating Income, and
- Return on Investment
Beyond being great for gauging the value of a current investment, both are also useful for getting an idea of whether a property is a good potential investment.
You can use estimations based on local market data to get a rough idea of both the potential NOI and ROI on a property you’re considering purchasing.
However, there are other ways to get an even clearer idea of whether a property is a good potential investment as well.
- Gross rent multiplier (GRM), and
- Capitalization rate (or simply cap rate)
Let’s break down each so you have tools for not just calculating your rental income and return on your current investments, but also whether a property you’re considering purchasing is a good potential investment.
How to calculate the Gross Rent Multiplier
Gross rent multiplier, or GRM, is a calculation that takes into account the property’s value and its gross annual income.
The calculation for GRM is:
Property Value / Gross Annual Rental Income = Gross Rent Multiplier
By taking the price that was paid for the property and dividing it by the estimated annual rental income, you can get a rough picture of the potential profitability of the property before purchasing.
GRM is particularly useful for calculating how long it will take you to pay off a particular property.
However, as with any other calculation like this, you shouldn’t depend on it alone to provide adequate information to inform whether a property is worth investing in.
This is just a piece of the greater picture, albeit a valuable one.
Learn more about how to calculate a property’s GRM here: How to calculate gross rent multiplier.
How to calculate the Cap Rate
Second, let’s talk about another useful calculation: cap rate.
Capitalization rate is great for figuring out if a rental property is a sound investment as it tells you what your rental income is relative to the market value of the property.
In this way, it can be an even more useful calculation than GRM.
However, each is different and has value in different situations.
The calculation for cap rate is:
First is net operating income.
We covered that above, so you should have a clear idea of why it’s important.
Net operating income tells you how much income your rental property is generating after factoring in expenses.
But there’s one more element to cap rate: current fair market value.
This can refer either to the asking price or the price which the investor is willing to offer for the property.
To get a quick calculation, you can take the current listing price if there is one.
Alternatively, you can compare other properties in the area to estimate the property’s value, which can lead to a more accurate calculation in some cases.
Net Operating Income / Current Fair Market Value = Cap Rate
$150,000 / $750,000 = 0.20
Typically, cap rate is shown as a percentage, which in this case would be 20%.
You generally want this number to be as high as possible, as the cap rate tells you how much of the current value of the home you’re bringing in for that year.
Learn more about cap rate and how to calculate it here: How to calculate cap rate.
Don’t leave your investment up to the numbers. Give yourself an unfair advantage with DoorLoop
There are many different ways to calculate if your current or potential investment is a good one.
We hope with these new tools you’re able to gain a better idea of whether:
- Your current rental properties are profitable, and
- Whether other properties are worth investing into
There are other ways to maximize the return on your time and investment as well.
One way is with a property management tool like DoorLoop.
With DoorLoop, you’re able to:
- Streamline rent collection, saving you time and allowing you to collect more rent more reliably
- Simplify property maintenance and tenant communications, saving you time and your process significantly
- Centralize all your property accounting in a platform designed for property accounting, unlike QuickBooks which requires multiple workarounds
- Automatic listings to keep your occupancy rate high by filling your vacancies sooner
- And much more
Schedule a free demo today to see for yourself what DoorLoop can do for you.