Whether you’re deciding to purchase a rental property in Glendora, CA, or already own one, calculating rental property profit potential is one of the best things landlords can do.
Knowing an estimated amount of money you’ll profit from your real estate investment gives you an upper hand. You can make data-driven decisions about your investment and set goals for it.
But how exactly do you calculate rental property profit potential?
By the end of this article, you’ll know how to calculate your rental property’s profit potential and a secret resource to get the most accurate number for your rent price.
Before we discuss the step-by-step guide to calculating rental property profit potential, let’s consider why it’s important for landlords and real estate investors.
This simple number can tell you a lot about the potential of a rental property investment. It can help you determine whether it is worth your time and money.
Calculating the profit potential also helps you understand where you can maximize your ROI.
While shopping around for your next (or first) rental property, you will want to estimate how much you can profit from your investment.
This is especially helpful when you are deciding between two or three rental properties to buy. You can use the potential profit when making your decision.
In some cases, you may find that the potential profit of one of the properties is not as much as you had hoped for. Therefore, you can proceed with exploring other options.
If you own a rental property, calculating its profit potential is still a good idea. This allows you to analyze your current expenses and the rental price and see where you can adjust to increase the profit potential.
You may also consider working to increase the property value allowing you to ask for a higher rent to improve profit potential from this analysis too.
Calculating rental property profit potential is much simpler than you may think. It doesn’t take a math genius, just a simple formula, and our step-by-step guide.
The first step in finding your rental property’s profit potential is determining how much you will ask for monthly rent.
Many factors contribute to the rent price of a property. These include:
When determining the rent, conduct a comparative market analysis of rentals in the neighborhood. Find properties that are similar to yours, that are in the same condition, the same size, and offer the same bedrooms, bathrooms, and amenities.
Analyze how much these rentals are asking for each month. This will give you a base number of what you could set your rent price to.
Another way to determine your rent price is to use the 1% rule. This rule states that the rent should equal 1% of the property’s value. So, if the property has a value of $250,000, theoretically, you could set the rent price to $2,500 per month.
Owning a rental property comes with monthly and annual expenses. When calculating the profit potential, you’ll have to add up all of these expenses.
Common rental property expenses include:
These do not have to be exact numbers, but general estimates, especially if you do not own the property yet.
A majority of landlords spend about 50% of their revenue on operating costs. Maintenance can cost around 1% of the property’s value each year too.
We now have the two important pieces of information required to calculate a rental property’s profit potential.
To do so, subtract the monthly operating costs from the monthly rent price.
Monthly Rent – Monthly Operating Costs = Potential Profit
This will determine how much you can expect to profit each month.
To figure out how much you’ll profit each year, simply multiply by 12.
Seasoned real estate investors often use the ROI, or return on investment, which is the same as the potential profit for their investment.
It is a performance indicator that helps investors understand the success of their investment.
Another way to calculate ROI is by using the formula below:
(Rental Income – Monthly Expenses)/Mortgage Payment = ROI
Now, this will give you a percentage instead of a dollar amount, as we discussed previously.
Many investors aim for an ROI between 4% and 10%. However, those looking for an excellent opportunity aim for an ROI between 8% and 15%.
The best way to accurately calculate your rental property’s profit potential is by setting the correct rent price. This can be one of the most confusing parts of owning a rental property. Setting a price too low could result in lower profit, or none at all in some cases.
With Lotus Property Services in Glendora, CA, our real estate experts can determine the correct rental price based on various factors related to your rental property.
Request your free rental analysis to start calculating rental property profit potential today!
Calculating rental property profit potential is just the first step to maximizing your real estate investment.
Working with a professional property management company like Lotus Property Services in Glendora, CA, ensures your rental property investment is operating to its fullest potential.
With a team of real estate experts constantly analyzing your rental property’s performance and market rental prices, and increasing property value, you can maximize your ROI over time.
If you enjoyed this article, read Can You Use an FHA Loan to Buy Investment Property in Los Angeles, CA, next!
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