How to Calculate the Return on Investment Rental Property

Written by solomon poretsky
• Share
• Tweet
• Share
• Pin
• Email

There are a number of different ways to calculate a return on investment real estate property, and although they may look like simple, or complicated, mathematical accounting calculations, they are, in fact, much more amorphous. However, by calculating a return that is based on standardised assumptions, you can better understand how your investment is performing relative to other investments as well as your goals.

Skill level:
Moderate

Instructions

1. 1

Compute your property's effective gross income--it's typically equal to your actual rent collections over the past year plus any additional income that you can count on continuing to receive. For instance, if you have an apartment building, you can usually count on receiving income from a laundry room on a year-by-year basis. With an office building, you may receive annual reimbursements from tenants for maintenance costs for common areas. Both of these should be included as additional income. If your building is experiencing better-than-market occupancy, you should subtract a vacancy factor. One good rule of thumb is to reduce the gross income of a 100 per cent-occupied building by 5 per cent. For instance, if your building generates £120,250 in annual rent and £9,750 in other income, you would then subtract a £6,500 vacancy factor to come up with an effective gross income of £123,500.

2. 2

3. 3

Subtract your total expenses from your effective gross income to find your net operating income, usually referred to by its initials. This represents your yearly net income from the property relative to its income and performance.

4. 4

Find the cap rate of the property based on what you paid for it by dividing your NOI by your original purchase price. That represents your yearly unleveraged return as a percentage. To see how your returns are today, divide the NOI by today's value.

5. 5

Don't Miss

• All types
• Articles
• Slideshows
• Videos
Sort:
• Most relevant
• Most popular
• Most recent