Net operating income = Your gross rental income less your operating expenses, such as payroll or repairs. The following steps will help you determine this number:
Many real estate investors include an estimated loss of rent of 5-10% in their calculations. If you assume 90% occupancy, the following example would be:
The capitalization rate or "caprate" is one of the most commonly used indicators of a property’s investment potential. The cap rate, which is a calculation for the potential annual return on your investment--the loss and gain that you will see, is used to calculate the capitalization rate.
To make wise investments in residential real estate, you need to be able to comprehend certain financial concepts. There are many formulas, metrics, and financial advice that can help you evaluate potential properties. Don't be overwhelmed. It is not possible to make a decision about whether or not an investment is right for your needs. But, you can still learn about the different valuation tools so you have the information you need to find the right method for every prospect.
Above, the cap rate calculation assumes you are receiving full rent each monthly. In other words, the property is 100% used 365 days a year and your tenants pay the rent. A single-family home might experience 100% occupancy on a regular basis, but it is less likely in multi-unit buildings that have more turnover. In order to calculate your cap rate, make sure you account for less than 100% occupancy. Here's how:
There are several ways to calculate the cap rates, but this is the most common. This is the basic formula:
Your annual operating expenses will be $5,800. $3,800 is for property taxes. $2,000 is for maintenance.