How can you figure out your investment return on your rental property? I’ll go over two ways to do that today.
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How can you calculate what your return will be on an investment? There are actually two ways.
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There are two ways to calculate your investment return depending on whether you used cash or financed the purchase.
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The first way to calculate your return is by figuring out the cap rate. With cap rate, you’re basically going to take your net profit of rental income after taxes and expenses and divide it by the property value. For example, if you are bringing in $10,000 a year on a home you paid $100,000 cash for, your cap rate is 10%.
$10,000 (net rent) / $100,000 (purchase price) = .10 (multiplied by 100 is 10%)
The other way is to figure out your cash-on-cash return. If you’re using a mortgage, you’ll put less money down and will be leveraging the bank’s money, so, you’d take that $10,000 net profit and subtract the debt service. If you spent $20,000 out of pocket to purchase that $100,000 home and the debt service was say, $5,000, your return would be 25%.
$10,000 (net rent) - $5,000 (debt service) = $5,000
$5,000 / $20,000 (down payment with a mortgage) = 0.25 (multiplied by 100 is 25%)
If you have any questions on this topic or if you have any other questions about real estate, please don’t hesitate to reach out. I look forward to hearing from you!
