how do you calculate whether a rental property is worthwhile?

The only thing the one per cent rule says is that a property must be rented for one per cent or more of its total initial cost. The Capital Asset Pricing Model (CAPM) is a more comprehensive valuation tool.

how do you calculate whether a rental property is worthwhile?

The only thing the one per cent rule says is that a property must be rented for one per cent or more of its total initial cost. The Capital Asset Pricing Model (CAPM) is a more comprehensive valuation tool. The CAPM introduces the concepts of risk and opportunity cost in its application to real estate investment. While it may be similar to the income approach, the gross income multiplier approach does not use net operating income as the capitalisation rate, but gross income.

Return on investment, or ROI, is one of the most common terms used in real estate. ROI shows the expected returns from a given transaction as a percentage and is relatively simple to calculate. This makes it an easy benchmark for investors analysing deals. To calculate the ROI of a property, take the estimated annual rate of return, divide it by the price of the property and then convert it into a percentage.

Rental properties have been known to yield between five and ten per cent, and some investments even exceed ten per cent. You do not have to take out a mortgage to rent a property. You can buy with cash if you wish. But it is worth noting that leveraging loans for rental property does not always mean higher risk, or worse cash returns.

You take the value of the property and divide it by the gross rental income for the year. The resulting figure is known as the gross rental multiplier (GRM). It is also known as the gross income multiplier (GIM). Find rental data including gross rent, net rent and gross yield - everything you need to make informed investment decisions.

While it is not impossible to have a non-existent vacancy rate, the possibility of vacancy must be taken into account when calculating potential rental expenses. A friend of mine who also invests in rental properties insists that all of his properties produce at least a 6 per cent return on ashes. While these calculations may seem daunting at first, understanding how rental income and other things are calculated is crucial to the analysis of any deal. As a rule of thumb, expect your rental property expenses to be around 50 per cent of the rent (also known as the 50 per cent rule).

The Capital Asset Pricing Model (CAPM) is a more accurate means of assessing potential rental income. To calculate the profit or return on any investment, first take the total return on the investment and subtract the original cost of the investment. If the neighbourhood is clean, pleasant and safe, your rental will attract tenants who also value those things. If I have a long list of potential properties, I will narrow my list to those whose gross rent multipliers are in the lowest 10-20% of the market.

Now, let's look at some calculations you can make to determine if a property is worth investing in. Some sellers will be much more flexible than others when it comes to negotiating, so this is an imperfect way to evaluate properties. If there is no rental history available for that property, check rental listings for comparable properties in the area, ask a local property manager for an opinion or get a rental appraisal. We have included a mortgage calculator for rental properties in the broader rental cash flow calculator above to make it easier to crunch the numbers if you are leveraging other people's money to build your rental portfolio.

The income approach focuses on the potential return on the rental property relative to the initial investment.

Courtney Thomson
Courtney Thomson

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