Affluent Savvy
Photo by Nataliya Vaitkevich Pexels Logo Photo: Nataliya Vaitkevich

What is a good monthly return on rental property?

The 2% rule in real estate is another simple way to calculate ROI for rental properties. According to this rule, if the monthly rent for a rental property is at least 2% of its purchase price, then odds are it should generate positive cash flow.

finance.yahoo.com - What Is ROI for Rental Property? - Yahoo Finance
Why mantra is chanted 108 times?
Why mantra is chanted 108 times?

According to Ayurveda, we have 108 marma points (vital points of life forces) in our body. So, this is why all mantras are chanted 108 times...

Read More »
Last updated May 1, 2019
How can I make money flowing into my life?
How can I make money flowing into my life?

So, take the right actions using these 15 tips on how to attract money. Have a positive attitude. Create a productive money mindset. Stop worrying....

Read More »
Last updated Aug 30, 2020
Awaken your dormant DNA ability to attract wealth effortlessly
Awaken your dormant DNA ability to attract wealth effortlessly

The simple yet scientifically proven Wealth DNA method laid out in the report allows you to effortlessly start attracting the wealth and abundance you deserve.

Learn More »
Promotion

how to calculate ROI on rental property

Owning a rental property can be an excellent way to create a passive income stream. Before you buy, however, it’s helpful to know how to calculate ROI on a rental property to make sure it’s a smart investment. There’s more than one way to determine a rental property’s expected ROI when gauging how profitable it’s likely to be. For help figuring out how rental properties could work into your financial plan, consider working with a financial advisor.

What Is ROI for Rental Property?

ROI stands for return on investment. Put simply, it is how much money you make (or lose) on any investment. The ROI for a rental property represents how much income the property produces versus the amount of money you invest in maintaining it. If you’re interested in owning rental property for passive income, ROI is an important consideration. Failing to perform an ROI calculation means going in blind, which is never a good idea. It’s also helpful to perform ROI calculations on a rolling basis once you own a rental property to estimate your profit margin. When inflation pushes up the cost of maintenance, for example, that can directly affect your bottom line.

How to Calculate ROI on Rental Property

how to calculate ROI on rental property

The simplest way to calculate ROI on a rental property is to subtract annual operating costs from annual rental income and divide the total by the mortgage value. However, there are some other calculations you can use to determine how much of a return you might expect when investing in a specific property.

Cash Flow ROI Calculation

Cash flow properties generate a steady stream of cash each month after operating expenses are paid. The cash flow ROI calculation is fairly straightforward:

Gross rent – Expenses = Cash flow

Operating expenses for rental property can include things like marketing or advertising while the property is vacant, property management services if you’re hiring someone else to oversee the property, repairs, maintenance, property taxes and insurance.

Story continues

The cash flow ROI calculation tells you how much money you can expect to pocket monthly from a rental property, based purely on what comes in and what goes out.

Cash-on-Cash Return

Cash-on-cash return measures a rental property’s annual cash flow based on the amount of cash invested. Here’s how to find cash-on-cash return for a rental property:

Annual cash flow / Total cash invested x 100 = Cash-on-cash return

What are the 2 vegetables that destroy stomach fat?
What are the 2 vegetables that destroy stomach fat?

These veggies: certain vegetables such as broccoli, cauliflower, brussel sprouts, kale and cabbage contain special phytonutrients (fight-o-...

Read More »
Last updated Jun 3, 2020
Why do flies not like cinnamon?
Why do flies not like cinnamon?

Cinnamon The smell is overpowering, and some of its components can be toxic to flies. Of course, your favourite cinnamon-scented candle won't quite...

Read More »
Last updated Jul 5, 2022
Awaken your dormant DNA ability to attract wealth effortlessly
Awaken your dormant DNA ability to attract wealth effortlessly

The simple yet scientifically proven Wealth DNA method laid out in the report allows you to effortlessly start attracting the wealth and abundance you deserve.

Learn More »
Promotion

This ROI calculation is typically used to gauge how well a rental property might perform over a given year, based on how much cash you invest in it.

Cap Rate

The cap rate or capitalization rate for a rental property is the estimated rate of return. To find the cap rate, you’d divide the net operating income of a property by its purchase price.

Net operating income / Purchase price x 100 = Cap rate

The lower the cap rate, the lower the risk while a higher cap rate can suggest that a rental property is a riskier investment.

Net Operating Income

Net operating income or NOI is the difference between the rental income a property generates and what you pay for operating expenses and vacancy losses. Here’s how to find NOI for a rental property:

Rental income – Operating expenses – Vacancy losses = NOI

NOI measures profitability based solely on operating expenses and vacancy losses. This calculation does not include mortgage expenses if you’ve taken out a loan to purchase the property. You might use NOI to calculate ROI on a rental property if you’re comparing multiple properties since you don’t need mortgage details to make the calculations.

What Is the 2% Rule in Real Estate?

The 2% rule in real estate is another simple way to calculate ROI for rental properties. According to this rule, if the monthly rent for a rental property is at least 2% of its purchase price, then odds are it should generate positive cash flow.

The calculation for the 2% rule looks like this:

Monthly rent / Purchase price x 100 = X

In this case, X represents the percentage you get after completing the calculation. If you do the calculation and get 2% or higher, then the property is likely to produce positive cash flow. On the other hand, if you get a number below 2% then the property may not be profitable.

What Is a Good Rate of Return for a Rental Property?

how to calculate ROI on rental property

Just as there’s no single option for how to calculate ROI on a rental property, there’s no set-in-stone number that translates to a good rate of return. The reason is that there are a variety of factors that can influence the returns a property generates, including:

Purchase price

Who made money first?
Who made money first?

In 600 BCE, Lydia's King Alyattes minted what is believed to be the first official currency, the Lydian stater. The coins were made from electrum,...

Read More »
Last updated Jun 28, 2022
What does the Bible say about the chakras?
What does the Bible say about the chakras?

While chakras aren't mentioned specifically in the Bible, we can see that it is possible that just as God created our bodies with pathways for...

Read More »
Last updated Feb 25, 2021
Awaken your dormant DNA ability to attract wealth effortlessly
Awaken your dormant DNA ability to attract wealth effortlessly

The simple yet scientifically proven Wealth DNA method laid out in the report allows you to effortlessly start attracting the wealth and abundance you deserve.

Learn More »
Promotion

Mortgage costs, including your down payment, closing costs and monthly payments

Rental income

Occupancy and vacancy rates

Operating expenses

When gauging what is a good rate of return for a rental property, it’s important to consider your specific goals and objectives. For example, you might have a baseline ROI or cash flow target that you’re hoping to reach monthly or annually. Looking at the rate of return in that context can help you to evaluate prospective investments and find ones that are most likely to align with both your goals and risk tolerance. It’s also important to consider overall demand and market conditions in the area where you’re shopping for rental properties. Rental housing is something people will still need, even if the economy weakens or slips into a depression. However, a changing economic landscape may see demand for rental properties cooling in the hottest or most expensive markets. High inflation can also shrink profit margins if you’re spending more to maintain the property.

The Bottom Line

Knowing how to calculate ROI on a rental property can be invaluable when you’re searching for the right properties to invest in. Running multiple calculations using different formulas can offer varying perspectives on how much profit you might expect to see. You can then compare those numbers to the returns you’re hoping to see in order to decide if a property is a good match.

Investing Tips

Consider talking to a financial advisor about the pros and cons of rental property investing and whether it might be right for you. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now. If you’d like to invest in a rental property without owning it, you might consider a real estate investment trust (REIT) instead. A REIT owns and manages real estate investment properties while paying out dividends to investors.

Photo credit: ©iStock.com/ArLawKa AungTun, ©iStock.com/xeni4ka, ©iStock.com/Sundry Photography

The post How to Calculate ROI on Rental Properties appeared first on SmartAsset Blog.

finance.yahoo.com - What Is ROI for Rental Property? - Yahoo Finance
What signs have physical touch as a love language?
What signs have physical touch as a love language?

Scorpio to Taurus: 4 Zodiac signs whose love language is physical touch Taurus. Be it cuddling or holding hands, this star sign uses intimacy to...

Read More »
Last updated Nov 26, 2020
What salary can I live on?
What salary can I live on?

California's living wage is $19.41, or $40,371 a year for an individual. A family of four requires $27.42, or $101,378 a year. Childcare costs will...

Read More »
Last updated Dec 5, 2020
Awaken your dormant DNA ability to attract wealth effortlessly
Awaken your dormant DNA ability to attract wealth effortlessly

The simple yet scientifically proven Wealth DNA method laid out in the report allows you to effortlessly start attracting the wealth and abundance you deserve.

Learn More »
Promotion
What color is most inspiring?
What color is most inspiring?

Blue is often used for inspiration, healing and relaxation. Green is a color associated with nature, growth, life and creativity. The color is used...

Read More »
Last updated Jun 16, 2020
Who has the most views in 1 hour?
Who has the most views in 1 hour?

BTS's latest single “Butter” has broken “Dynamite's” record as the fastest video to reach 10 million views on YouTube. “Butter” has also beat...

Read More »
Last updated Apr 21, 2021