Knowing your rental property income is key to keeping on top of your investment and ensuring it’s netting you the ROI you need. On its face, calculating rental property income seems as if it should be simple and straightforward. The reality is a bit different, unfortunately. Make sure you’re taking all these key factors into account when you calculate your income:
Understand the Limits of GRI
Your GRI, or gross rental income, is helpful but very limited. GRI is simply the amount of rent you can expect to get from your property assuming full occupancy and taking the market into consideration. Normally, you’re looking at GRI from the perspective of the entire period you plan to hold on to your property, and some investors use GRI to get a fast frame of reference for making decisions.
How It Misleads
The biggest problem is that GRI can be misleading in the end. For one thing, the market can fluctuate far more than your original GRI calculations took into consideration. It also can’t account for unexpected vacancies or losses on collection that you weren’t expecting. In some cases, if you have a unit standing empty, the best way to calculate it for the purposes of GRI is to estimate it using a similar, occupied unit. Where this gets tricky as if there have been significant changes to one of the units or changes suddenly occur in the market that make it difficult to get that same level of rent.
Of course the biggest limitation to GRI is the need to have solid, accurate forecasting of the local housing rental situation for the entire holding. This can be very difficult to achieve, especially if rents are currently rising or declining rather than staying stable.
NOI Has Limits, Too
Your NOI, or net operating income, is a better measurement of the true income potential of your property then your GRI, but that doesn’t mean it has no limitations. To calculate your NOI, you’ll need all the following numbers:
- Annual gross rental income
- Annual income from other sources (such as parking spots or vending machines)
- Annual losses from vacancy or collection issues
- Annual property taxes
- Insurance coverage costs
- Property management fees
- All maintenance and repair costs
- Miscellaneous expenses
Your NOI is what you’ll most often use to calculate where you are and where you’re going. You’ll also want to compare NOI among the various properties you might own to see if you need to make some changes or if a property is threatening to become unaffordable after you factor in the mortgage payment.
How It’s Limited
Obviously, there are some limits even to this calculation. For one thing, you can calculate it with perfect accuracy backwards; but going forwards it’s always a bit of a guess. You can only use your general experience and current market averages in your area to estimate how long units may stay vacant and what kind of maintenance and repair costs may pop up unexpectedly. It can also be hard to anticipate at times when property taxes, property management fees, or insurance premiums may go up.
How to Use It Best
This means the most valuable use of your NOI is as a figure to re-examine each year for each property you own to see where you stand and where you’re headed. Here’s some of what you can learn:
- The general trend of profitability for the property
- Whether your rents are really covering expenses or might need to be raised
- Whether a reoccurring repair may be signaling you need a more permanent (and expensive) fix
- Whether cash flow is keeping up with expenses
- If your ROI is where you want it to stay profitable
Don’t Forget You Fees
A common mistake in calculating rental property income is missing those little fees that aren’t always prominent on your radar.
HOA and Maintenance
Homeowners Association Fees, for example, can be higher than you expect. Property maintenance fees can add up, too, and you need to know how they’re calculated precisely. In some cases, the maintenance fees are taken care of by the property management company; in others, you’ll need to coordinate separately to ensure maintenance and landscaping are kept up.
Taxes are another important factor. Property taxes are probably already on your radar, but municipal taxes that change quickly. In some cities, citizens have given the local authorities the right to add on a certain percentage to property taxes in a given year at their discretion to pay for certain approved projects. In others, the city might just re-do the street lights and then suddenly be at your door demanding a yearly or monthly fee for upkeep. Do your due diligence and you won’t be caught out.
Market Rents Don’t Care About Your Expenses
You have lots of numbers written down: your mortgage payments, your yearly taxes, fees for fixing all those outdoor lights. Unfortunately, the local rental market couldn’t care less what you think your property is worth or how much loss you need to recoup. The market sets the prices, and you’ll have to adapt or renters will go elsewhere.
You need to take the market into account calculating rental property income rate. Know what you’ll be able to bring in for rent and whether it’s profitable for you. Take a look at the market, but also take a look at demand. If demand is high, you may be able to get better rent simply by offering some small, cost-effective amenities. If demand is low, you may not be able to count on getting the highest average rents for every unit and would be wise to set your estimates a bit lower.
Upgrades Can Only Do So Much
Upgrades are important and do offer a certain amount of return on investment. If you are considering remodeling, however, understand which ones will positively affect your rental income and which could be just a waste of money. When you’re calculating rental property income, remodeling can be an unexpected factor that works in your favor (or not).
Certain remodels and improvements almost always improve your property value and enhance tenant retention. These include plumbing upgrades and better appliances. Outdoor space is also valuable and something that tenants are often willing to pay more for and will stick around to take advantage of.
On the other hand, open floor plans may be all the rage, and they do make the property look bigger; but they are also a project that can easily get out of hand. The original design of the building structure may make it extremely expensive to work around loadbearing walls. for instance; and the same open plan that might attract one family may turn away another who want to have more separate private areas.
Don’t Forget Your Tax Deductions
A final factor in calculating your rental property income is understanding what tax deductions you can take and leveraging these against expenses in a given year. For example, when you make those remodels and upgrades, obviously you have to spend money. However, you can often write off those expenses on your taxes. You may also be able to factor depreciation into update costs and the total value of the property when calculating income tax.
Learn More About Calculating Rental Property Income
If you’re ready to get free from your corporate job or traditional Wall Street investments, real estate investments are the perfect way to ensure regular passive income so you can have the future you want. Subscribe today to the Creating Wealth Show podcast and learn from Jason Hartman how to calculate rental property income and make the most of your investment.