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Calculating the profitability of a rental property is actually pretty easy once you know how to do it. Real estate investing is not only for the academic type of person. The good thing about rental properties is that you can get a stable return with only a little effort in the beginning. It is like a business, that runs without employees. Keep in mind, that if you are not familiar with accounting rules when reporting taxes, you should consult an accountant in order not to hurt your returns. Let's dive into the simple calculations.
1. Scanning for properties - the 1 % rule
As a rule of thumb, if you divide the market rent with the purchase price of the property, it is worth going to step 2 in order to make the calculations in detail.
Worth looking at: Market rent / Purchase price > 1%
However, check out the Property Condition Report first. If there are a million expensive maintenance tasks to be carried out, move on to the next property. Or if the maintenance tasks are concerned about the integrity of the house, move on to the next property.
2. The numbers to find to insert in the calculation table
Below are the numbers you should get from the sales presentation of the property. The numbers are collected from a property, which support the 1% rule. Notice, that some rental properties can be even more profitable.
|Income/expense line||Example numbers||Return on equity|
|Rent * 12 (+utility $1,235)||$11,470|
|Loan expenses * 12||($2,470)|
|Maintenance (10% of rent)||($1,023)|
|Tax (In author's country 22%)||($1,172)|
|Appreciation (2% of purhcase price)||$1,588|
3. Final notes
Obtaining good debt for an investment property can really help to improve your return on equity. It is like a safe way to use debt, because the debt is backed by something real. It is more important that your rental property is profitable than to bet on price appreciation. Cash flow is the most important thing. If you can find a rental property that gives you a return on equity of about 35-45%, you will be very well off in the future. Because it only takes a little more than 2 years to get your money back, so you can compound it fast.
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