You don’t have to guess if your rental property is a good investment. Our rental property evaluation tool can help you evaluate your rental and compare it with other potential investments.
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Five measurements of a real estate investment’s value
The 1% Rule
The 1% rules is a quick and dirty way used by many investors to determine if a rental property is a good investment. In it’s simplest form, it multiplies your gross monthly rent times 100 to determine the maximum purchase price. For example, if gross rents each month are $1,200 the maximum you would want to pay for this property would be $120,000.
Gross Rent Multiplier
The Gross Rent Multiplier for an investment property allows you to compare two different properties. It is a ratio of comparing the gross rents to the purchase price. To calculate the Gross Rent Multiplier divide the gross rents by the purchase price.
Purchase Price / Gross Annual Rents = Gross Rent Multiplier
Another way of thinking of the GRM is, “If I collect all of the rents and don’t have any repairs, now many years will it be before this investment is paid for?”
When using the Gross Rent Multiplier, be consistent with whether or not you include immediate repairs and closing costs. Our calculator includes both of these.
CAP Rate
Capitalization Rate is universally used as a way of comparing two or more investments. It is determined by dividing the net annual operating income(NOI) of the investment, by the purchase price or market value. The higher the CAP rate, the better the investment. CAP rate does not account for any debt or mortgages against the property.
In our calculator we also include any repairs that must be completed on purchase as we consider this part of the initial purchase costs. If you have inherited the property, we calculate the CAP rate based on the market value of the property. If you purchased the property from a sibling, enter choose “Purchasing the Property” and enter you purchase price and closings costs.
Cash on Cash return
Cash on cash or CoC return is similar to CAP rate except that Cash on Cash compares the actual amount of money you put into a property and accounts for financing. Unlike CAP rates, Cash on cash returns include financing costs.
In our calculator, we include your purchase price and any repairs you must make as part of your initial cash investment.
Monthly cash flow
Having a positive cash flow is extremely important when you own rental properties. A good rental investment will have at least 50% of it’s monthly rental income left over after paying all of the bills. This of course assumes you don’t have a mortgage on the property. If you have a mortgage, you should have a least $100 positive cash flow after accounting for all of your expenses.