You have probably heard the saying, “Knowledge is power.” Well, that is definitely true when it comes to rental investing. The more you know about the numbers involved in your investment, the better decisions you will be able to make. That is why today we are going to talk about one of the most fundamental tools for rental investors: the investment property calculator.
What Is an Investment Property Calculator?
An investment property calculator is a tool that is designed to help you calculate the potential return on investment (ROI) of your rental investment. It takes into consideration several factors, like the purchase price, mortgage payments, maintenance costs, and rent. With these pieces of information, it can give you an estimated ROI based on current market conditions. This can help you make more informed decisions about whether or not to invest in a particular property.
How Does This Calculator Work?
A real estate investment calculator works in two distinct steps.
First, it takes into account all of the expenses associated with owning and managing a rental investment property. These include the price of the property, mortgage, insurance, taxes, maintenance costs, vacancy rate, and other operating costs.
Next, it estimates your potential ROI by factoring in the expected income from rent payments along with any appreciation in the market value of the property over time. It also accounts for things, like tax deductions or credits, which can increase your overall ROI.
Understanding the 1% and 2% Rules
One of the most important concepts for rental investors to understand is the 1% and 2% rules. According to these rules, your investment property should generate a gross rent of at least 1% of its purchase price or 2% of its total cost. This means if you buy an investment property for $100,000, you should aim to get at least $1,000 in rent each month in order to make it worthwhile.
An investment property calculator can also help you determine if a particular investment property meets these criteria or not.
Are Investment Property Calculators Free to Use?
Yes, investment property calculators are often available for free online. They can be found on websites, like Zillow and Realtor.com, as well as through real estate investment software programs.
Some realtors and real estate agencies also offer free calculators on their sites for their clients. One good example is the one you will find here: https://theshorttermshop.com/cash-flow-calculator/. This calculator allows you to plug in your own investment data to create a personalized investment analysis.
What Are the Benefits of Using an Investment Property Calculator?
The biggest benefit of using a rental investment calculator is that it gives you a snapshot of how your investment might perform so you can decide if it is worth pursuing or not. It also allows you to quickly compare different investments side by side to find the best investment for your needs.
Finally, it helps you stay organized and on top of your investment decisions by keeping all of your data in one place. In a way, it can act as a “virtual investment advisor” that helps you make more informed investment decisions.
Using a Rental Investment Calculator to Compute ROI
As previously mentioned, the primary function of this calculator is to determine the expected ROI of a rental investment. Using relevant information, an ROI calculator real estate investors use will be able to tell you how much investment income is expected to be generated over time. This can help you determine whether or not investing in a certain property is worth it, and if so, how long it will take for you to break even.
Let us take this scenario, for example…
You are considering buying a rental property at $200,000. And, after some assessments, you found the expenses for running it to be $1,400 per month. These include your mortgage payment, insurance premiums, taxes, and other upkeep costs, such as repairs, maintenance, and utilities.
After factoring in the rent payments that you would receive from tenants each month (which is estimated at $2,000), you can use a house rent calculator to determine your expected return on investment.
In this example, your ROI calculator will tell you that you have a potential of 7% ROI over five years before accounting for appreciation or tax benefits.
Now, how was this calculated?
The investment property calculator first considered all of the associated costs. It then subtracted these expenses from the estimated rent payments you would receive each month ($2,000). This leaves you with a net operating income (NOI) of $600. The investment property calculator then divides this number by the total investment ($200,000), which gives you a 7% return on investment over five years.
So, is this a good number for ROI? Basically, something within the range of 5% to 10% is considered a good investment.
Determining an Existing Rental Property’s Cap Rate
The same as the ROI, a house rental calculator will also help you determine the capitalization rate (cap rate) of an investment property. This is the ratio of net operating income to the asset’s purchase price, which is used to measure investment performance.
For example, if you purchased a rental investment property at $200,000, and it generated an NOI of $24,000 per year (which would be determined by subtracting your expenses from your rent payments), then the cap rate for that investment would be 12%. This means that each dollar invested in this investment property would generate a return of 12 cents each year before taxes or appreciation are taken into consideration.
What Is the Ideal Cap Rate for Rental Properties?
The ideal cap rate for investment properties depends on the individual investor, their risk tolerance, and their investment goals. For example, an investor with a lower risk tolerance may prefer a property that has a lower cap rate but offers long-term stability and predictable returns, such as a single-family home.
Conversely, an investor looking for higher returns may prefer to invest in properties with higher cap rates but also carry more risks, such as multifamily housing or fixer-uppers. Ultimately, you should consider both your investment goals and your risk tolerance when investing in rental real estate.
But generally, the cap rate that you should aim for in rentals should range from 8% to 12%. This is because this range generally corresponds with the average returns of investment properties.
Computing How Much You Should Get for a Mortgage Loan
One important factor that lenders would look into when assessing loan applications by rental investors is the cash flow of the properties they are planning to buy. So, when you check investor cash flow loans, you should first determine the loan amount that you should get. And, a rental cash flow calculator will help you do just that!
With it, you can compute the loan amount that is suitable for your investment profile and goals. You will also receive a report with a detailed breakdown of all your expenses and income from rentals. This report will give you an accurate picture of how much money you need to secure in order to make sure your investment is profitable and sustainable over time.
But if you want something that can give you direct numbers, you could also use a mortgage calculator investment property experts recommend. Unlike the cash flow calculator, this investment property calculator can give you your exact projected loan payments, the interest rate, and an amortization schedule.
Investment Property Calculator FAQs
Q: Are investment property calculators difficult to use?
A: No, investment property calculators are generally easy to use and understand. They feature drop-down menus and other intuitive features that make it simple to enter the required information.
Q: What type of investment property calculator should I use?
A: The investment calculator that you decide to use depends on your investment goals and strategies. Again, if you’re looking for a detailed look at cash flow numbers, then a rental cash flow calculator is the way to go. Conversely, if you want exact loan numbers, then a mortgage repayment calculator can help with that.
Q: What is the best investment property calculator to use?
A: The investment property calculator that you choose to use should be tailored to your investment goals and strategies. What works best for one investor may not work as well for another.
Q: Can I make my own formula when using investment property calculators?
A: Yes, many investment property calculators allow you to customize up to certain parameters. This allows you to enter the information that is most important to your investment criteria.
Q: Is it better to use investment calculators online or download an investment calculator app?
A: It depends on how you use it. If you plan on using the calculator frequently, then downloading the app would be more convenient. However, if you just need a one-time calculation, then using a calculator online would suffice.
Wrapping It Up
In a nutshell, an investment property calculator is an invaluable tool for rental investors. It provides the data needed to make informed decisions while making it easy to organize and compare different investments. Plus, it helps you save money by ensuring that your investment strategy is profitable.
If you are serious about real estate investment, using this type of calculator should be your first step! So, what are you waiting for? Get calculating now!
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