How To Make A Rental Property Analysis
— Income and Equity
A rental property analysis quickly calculates two main variables that will help you determine whether a real estate investment will provide you with a positive rate of return.
Once you’ve determined your real estate goals, you can then analyze whether the rental properties available on the market are the right investments for you. By defining your investment criteria early, you’ll be able to quickly screen out properties that don’t match your “buy box profile.
Pro Tip: Be transparent with your real estate agent about your investment criteria. They can screen properties against your profile and present you with opportunities from the MLS, pocket listings, and even prospect off-market properties that match your wants, which saves you time!
Cash Flow—How To Determine How Much Income Your Rental Property Will Earn
There is a difference between income and cash flow.
Where cash flow signifies how much money comes into your account, income (or more precisely, net income,) shows how much money you have left after paying expenses such as loan payments, taxes, property maintenance, and insurance.
To determine your potential net income from your rental property, you can use the following six calculations:
- Gross Rent Multiplier (GRM)
- The 1% Rule
- Cap Rate
- The 50% Rule
- Net Income After Financing
- Cash-on-Cash Return
Gross Rent Multiplier (GRM)
Gross rent is the rent you collect before you subtract your expenses and deductions.
Understanding this number is important when evaluating potential real estate investments because you can easily find this information to compare properties.
The Gross Rent Multiplier is the ratio of the property’s total purchase price to its yearly gross rent. Simply take the total purchase price of the property and divide it by the yearly gross rent.
Say you buy a property for $500,000 and it produces $50,000 each year in rent income. This property has a GRM of 10. A property that you purchase for $300,000 but provides $15,000 in income has a GRM of 20.
The higher the score, the less desirable or profitable a property is.