Rental calculators are invaluable tools for landlords. Calculators help rental property investors choose investment properties that have the greatest income potential. Some calculators for landlords make it easier to evaluate if tenants can afford to pay rent. And other rental calculators help determine prorated rent. Whatever type of investment property you own, calculators can help maximize your rental income.
Experienced landlords know the wisdom of using various rental calculators. To run a successful and lucrative business, property owners, landlords, and property managers have many responsibilities. It is necessary to care for property maintenance, carry out a thorough screening process on all tenants, and maintain a healthy cash flow.
However, a positive cash flow depends on several variables. It’s vital to purchase a property that generates enough rental income so you can pay the mortgage, real estate taxes, and cover repair costs. Of course, you also need to make money as well.
From looking to purchase a rental property to signing the lease agreement with tenants, rental property calculators can help you every step of the way.
This article looks at the benefits of using four types of rent calculators and residential investment property calculators. Here you will learn about the following:
- Cash-on-Cash Return Calculator
- Gross Rent Multiplier Calculator
- Rent to Income Ratio Calculator
- Prorated Rent Calculator
Investment Property Calculators for Landlords
If you’re new to real estate investing or are already a real estate professional, calculators are essential tools for all areas of property management.
Read on to find out about the four most common calculators successful landlords use.
Cash-on-Cash Return Calculator
Cash-on-Cash (CoC) return calculators can help you buy the most profitable rental property. The CoC return calculator uses two figures to determine a property’s potential. You input the amount of your cash investment and your annual pre-tax income. The result is a percentage that represents the best revenue potential for your investment.
The cash-on-cash return calculator is one of the best ways to evaluate several properties at once. The property with the highest percentage is the one that is more likely to generate the highest monthly rental income.
How to use the cash-on-cash return calculator
Here is how to use the CoC calculator:
- Value of cash investment: Add up the investment property’s cost, closing costs, repair costs, interest fees, and other related operating costs.
- Annual pre-tax income: Calculate the total yearly income from the property. This includes the yearly rent price for each unit, parking income, and any additional income.
To use the cash-on-cash formula, divide the projected annual income by the cash investment value. You will end up with a decimal figure that you convert into a percentage.
How does the calculator work? Suppose you plan to invest $90,000 in a single-family home. You calculate that your annual income will be $8,300. Here is the formula for the CoC return calculator:
- $8,300 ÷ $90,000 = 0.092, or 9.2%
Any figure between 8% and 12% represents a solid real estate investment.
When using this property calculator, it’s important to remember that it’s a quick way to determine the return-on-investment potential. Unlike return-on-investment calculators, it doesn’t calculate tax benefits, appreciation, loans, and other factors. So, you will still need to carry out due diligence to ensure you make a wise real estate investment.
Gross Rent Multiplier Calculator
The Gross Rent Multiplier (GRM) calculator is a way for landlords to determine the potential profit you can make from a real estate investment. This simple calculator uses two factors in its calculation—the property’s market value and projected gross income from rent. The result represents the number of years it will take for the investment to pay for itself.
Like the CoC returns calculator, the GRM calculator helps assess potentially lucrative properties in real estate investing. The faster a property pays for itself, the quicker you will make money on your investment.
How to use the gross rent calculator
Here is how to use the GRM calculator if you’re considering buying a rental property:
- Property price: This is the purchase price or fair market value of the property.
- Gross annual income: Work out each unit’s monthly rental rate and multiply it by 12 for the yearly rent revenue.
To use the gross rent calculator formula, divide the property’s cost by the gross annual rent. The result is the number of years it will take to recoup your investment.
How does the gross rent calculator work? For example, say you want to invest in a multifamily building that’s on the market for $750,000. You calculate that gross rental income annually would be $95,000. Here is the formula for the GRM calculator:
- $750,000 ÷ 95,000 = 7.89
This means that it will take nearly eight years for the property to pay for itself. The GRM calculation is ideal for evaluating several properties to decide which ones have the best potential to make money. Due diligence would then include calculating property taxes, occupancy rate, maintenance costs, and operating income.
Also, negotiating a lower sale price or increasing rent will result in a lower figure and better investment potential.
Rent to Income Ratio Calculator
The Rent-to-Income ratio calculator is a vital tool to screen prospective tenants. Also called a “rent affordability calculator,” the ratio helps landlords know if a tenant can afford the monthly rental payment. This vital metric can help you determine if the tenant can pay rent on time.
Collecting rent is one of the most important tasks facing any landlord. It can also be challenging to deal with tenants who don’t make regular rental payments. Late rent payments disrupt your rental property income and increase the chance of evictions. In the end, your rental property cash flow depends on quality tenants who pay rent—and pay it on time.
Some landlords make a common mistake by assuming that a tenant who earns at least double the monthly rent can afford to live there. However, to afford regular rent, landlords must ensure that tenants make much more. This is where the rent to income ratio calculator is so vital.
How to use the rent-to-income ratio calculator
Here is how to use the rent-to-income ratio calculator when screening potential tenants:
- Gross monthly salary: This is the amount a person earns in a year before taxes or other deductions.
- Thirty percent: Tenants who spend up to 30 percent of their wages on rent are more likely to afford the rent price.
To use the rent affordability calculator, multiply their median salary by 30%. It’s wise to include monthly debt repayments, deposits to savings accounts, and monthly expenses. However, 30 percent and the gross salary are usually enough in the screening process.
How does the rent-to-income calculator work? Let’s say that a prospective tenant earns $5,375 a month. Your question is: “How much rent can this tenant afford?” Here is the formula to calculate rent affordability:
- $5,375 x 30% = $1,612
If you discover a tenant is paying more than 30 percent of their income on rent, be careful about signing the lease. The higher percentage they pay on rent, the greater the risk to your cash flow.
Tenants can also use the rent affordability calculator to find rental units they can afford.
Prorated Rent Calculator
Calculating prorated rent is for charging rent on a daily basis, rather than a monthly basis. This rent calculation method is practical when tenants don’t occupy the rental unit for the full month. Many landlords who use prorated rent calculators find it easier to reduce vacancy rates and attract more tenants.
Landlords also use rent collection apps such as RentDrop to charge prorated rent when billing on days other than the first of the month. For example, many landlords offer tenants flex rent payments that fit with their income schedule. This online rent collection method reduces late rent payments, late fees, and increases tenant satisfaction.
How to use the prorated rent calculator
Here’s how to use the prorated rent calculator to charge rent based on days, not full months:
- Monthly rental rate: This is the typical rent you charge for a calendar month
- Number of days in the month: Most calculators to prorate rent use the actual number of days.
How does the prorated rent calculator work? Let’s say that you charge $1,450 per month for rent. Your tenant plans to move in on the 12th of August. The month of August has 31 days, so there are 20 days to charge rent. Here is the formula for prorating rent:
- $1,450 ÷ 31 = $46.77 per day
- Rent due for August is $46.77 x 20 = $935.40
Here are other methods to calculate prorated rent:
- Divide the annual rent for the unit by 365 to get the average daily rent.
- Work out daily rent by dividing the monthly rent by the average days in a month, which is 30.42.
- Divide the monthly rent by a “banker’s month,” which is 30 days. You do this regardless of whether there are 28, 29, 30, or 31 days in the month.
Before prorating rent, it’s vital to check your local state laws. Some state rental laws specify which calculation method to use for charging prorated rent.
Rent Calculators — In Conclusion
If you want to be a successful landlord, rent calculators are crucial in many areas for earning a passive income from real estate investments. RentDrop is dedicated to helping new and experienced landlords run a lucrative rental business. You can find on our website four of the most popular calculators that property owners use. These calculators help determine potential rental profit from real estate investments. But you can also use them to screen potential tenants and provide the best service to people living in your properties.