How To Calculate The ROI Of Your Rental Property?

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rental property calculator

People invest because they want to grow their wealth. However, the decision of investment can go wrong as well. This is the reason why it is always good to start with an analysis to assess the potential profitability and risk management. People investing in real estate properties have one of the two motives which include rental income or waiting for a profitable deal.

Rental property can be a reliable passive income. To determine profitability, you need to calculate the ROI. Buying a rental property calculator is an option available to you.

It is not easy to calculate return on investment a residential property can generate. There are several variables that can have an influence on the investment and return. You might exclude an important factor or include an unnecessary factor.

A person investing in a rental property has two options. He can pay in cash. Or, he can go for a mortgage.

rental property calculator
rental property calculator

Calculating the return on investment

ROI= (Gain on Investment − Cost of Investment)/cost of investment

To calculate the profit on your investment, you need to have a total return on the investment and the original cost of the investment.

Calculating the return on investment on rental properties 

The return on investment formula seems to be pretty easy. However, when it comes to rental property ROI calculation, you have to consider many factors such as repair and maintenance expenses. The methods of figuring leverage is also an important factor. So, use the resources and technologies available to you. You can use a mortgage calculator. Similarly, buying a rental property calculator can also help in making the right decision.

Calculating return on investment for cash transactions 

Calculating ROI for cash transactions is straightforward. For example:

  • Cash Payment for the rental property: $100,000

  • Closing costs: $1000

  • Remodeling cost: $9,000

  • Total investment: $110,000

You are collecting a monthly rent of $1000.

A year later:

  • Yearly rent: $12,000

  • Annual expenses: $2400

  • Annual return: $12,000-$2400=$9600

Return on investment = $9,600/$110,000=0.087

ROI=8.7%

Calculating the return on investment for financed transactions 

Calculating the return on investment for financed transactions is a little complicated. The cost of the property is $100,000 but you took out a mortgage.

  • Down payment: $20,000

  • Closing costs: $2,500 up front

  • Remodeling cost: $9,000

  • Total out of pocket cost: $31,000

In addition to these costs, there are ongoing mortgage costs. Let’s assume that:

  • Loan term: 30 year

  • Interest rate: 4%

  • Total borrowed amount: $80,000

  • Monthly payment you have to make: $381.93

  • Insurance, water, taxes and other costs: $200

  • Total monthly payment: $581.93

  • Annual rental income: $12,000

  • Monthly cash flow: $418.07

A year later

  • Annual earning: $12,000

  • Annual return: $5,016.84

Return On Investment Calculation

  • Divide your annual return by original out-of-pocket expenses to determine ROI.

ROI:$5,016.84/$31,500= .0159 that is 15.9%

When it comes to calculating return on investment, you want the most accurate estimate while considering all the possible factors. You can take professional help or use a rental property calculator.