How to Calculate Rental Income for Investment Property - Part 2

Published on August 2, 2022 under How-To

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How Much Income Can You Make from a Rental Property?

In part one, we discussed what kinds of expenses come into play. Now, let's talk about how to assess and maximize the income there is to be made from a rental property.

Rent Price - Property Expenses = Rental Income

Now take the two numbers and combine them. How much can you ask for rent? How much will buying and maintaining the house cost for one year in total? If the rent price outweighs the expenses, you can generate a rental income from a residential property. The amount that your price exceeds your expenses will determine your level of rental income and how fast the property will return your investments and begin to generate a profit.

Income Factors to Be Aware Of

  • Vacancy Expenses
  • Rental Market Changes
  • Tenant Conflicts and Evictions

What about the long-term view? There are situations where your rental property income may fluctuate. The most common reason is vacancies. Time between tenants can become a critical expense. Every month without a rent payment is a month of expenses instead of income. However, turnover takes time. You will need to clean, inspect, repair, and repaint the unit rapidly before opening the unit to new tenants. Be prepared for one month of "down time" a year to stay ahead of your real tenant turnover rate.

Rental prices don't always rise. Some years, the average rental price may rise or fall. Tenants will maintain the same rent if they stay, but you may need to lower your prices to attract a new tenant in a competitive market.

Occasionally you may come across a bad tenant and eviction can cost you time, money, and stress. Plan ahead for how you might handle a tenant conflict or eviction, should it become necessary.

Assessing a Property for Rental Income

  • Determine rental range
  • Estimate starting rent
  • Determine property expenses
  • Subtract expenses from rent estimate to get income
  • Divide investment by income to get ROI months

How do you know when a property will make you money as a rental home? It's all in the balance. If the asking rental price is higher than your calculated expenses, it can make an income. Any home that can pay its own mortgage can eventually achieve a positive ROI, but surplus income can accelerate that timeline. Living off Rental Income after ROI

Some investment properties have great potential to generate positive income. The rental rates are higher than the expense to buy and maintain the house; enough that you can fully recoup your investment and, if you choose, pay off the mortgage early. When a home creates a return on its investment, then you have the opportunity to live off the profits or invest them for further gains. With the mortgage paid off, the largest portion of your landlord expenses are removed. This is exactly why residential real estate is a popular choice for retirement investments as well as young investors getting started in a sure market.

Once the mortgage is paid, every rental payment goes directly into your pocket - after you drop the appropriate amount into the maintenance savings. From there, you can choose to use your profits for personal use or reinvest in your home. How You Can Optimize Your Rental Property Income

Making home improvements can allow you to charge more for the property, within the rental range of the neighborhood. You can also reinvest your rental income into new homes and upgrades to expand your rental income stream.

Repairing a shabby home is a great way to maximize your potential income. Improving an already beautiful home and adapting to the trends can make your home among the most competitive in the local market. With the right rental income calculation, you can find the best homes to optimize your investment with each new property you add to your portfolio. First Savings Mortgage is here to help you purchase the right house at the right time, whether as your primary residence or a smart rental home investment. Contact us today for the financing you need to secure investment property once you are certain that the rental income balance is right for your portfolio.

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