A few calculations to determine if a rental property is a good investment.
The market is very different than it has been in the last 10 to 15 years. Many people start to think about making a real estate decision after the Super Bowl, which means activity will be rising now. Our office has been very busy! As people jump back in, many also start to think about investment real estate, which is what I’m here to talk about today.
First, it’s important that your rental property have a minimum rate of return of 7%. To calculate this, start by adding up all of your rental income. Then you can work to determine your net operating income (NOI). To do this, deduct expenses from your income. Consider your fixed costs, like property management fees, vacancy and credit laws, insurance, and property taxes.
“Real estate is the best long-term investment.”
In addition, if you don’t pay in cash, you’re going to have debt service. In short, this is talking about your mortgage payment. Take your NOI and subtract your debt service from it, then you have calculated your cash flow. If you divide your cash flow by your initial investment, then you have your rate of return.
Again, I recommend that your rate of return be at least between 7% and 8%. In many cases, it will be more than that. Then comes the concept of the Rule of 72, which is a simplified formula that calculates how long it’ll take for an investment to double in value. For example, if your rate of return is 10%, divide 72 by 10, and the Rule of 72 means your investment will double in 7.2 years. The higher that number is, the faster your money multiplies.
I’m a huge believer in investment real estate, and I think there’s no better long-term investment. If you want to take advantage of this opportunity, don’t hesitate to reach out! I can also help you do all of these calculations. Call or email me anytime — I look forward to hearing from you.