Rental prices in NC are on the rise. There are a lot of things to look at with any potential new rental property, but the numbers are always first. Before you buy, you need to conduct a rental analysis to understand if the investment is worth making.
If you're a seasoned investor, you're probably well versed in rental valuation. However, for those who are looking to buy their first investment property, this guide can help. Read on to find out how to conduct a rental analysis on your North Carolina property to make sure the numbers add up.
A Rental Analysis Rundown
It's best to use a spreadsheet to calculate the potential rental income that a property can provide. When you're out and about, a spreadsheet isn't always available. That being the case, make sure you have a pen and paper with you to make it easier for you to crunch the numbers on the go.
Figure Out the Gross Income
The gross income is the rent currently being paid by tenants or the amount that's being asked in a property for rent by the owner. Once you know the amount, think about whether or not it's reasonable for the location of the home. Is it at, above, or below market value?
Estimate the Monthly Expenses
Monthly expenses include property taxes, management fees, HOA fees (if relevant), and any financing or mortgage costs. It's crucial to include potential vacancies and repairs in your monthly expense estimate. They can significantly impact the profitability of a property and are a reality in the investment property world.
Include the following in your monthly expense estimate:
- Property taxes
- Insurance
- Property management company fee (10% of monthly rent)
- Utilities
- HOA
- Financing
- Vacancy (estimate 10% of the monthly rent to vacancy expenses)
- Repairs (estimate 5% of monthly rent to repairs)
Last, subtract your estimated monthly expenses from the monthly gross income. If the number is positive, you've got a profitable property on your hands. If not, move on.
Calculating the Returns
To understand the profitability of a property, you need to know the capitalization rate and the cash-on-cash return. Both numbers will provide more detail on these figures.
Capitalization Rate
Capitalization rate, or cap rate, will help you determine if you're getting a good deal. It's a simple way of comparing the return on investment to the price you pay for it.
The equation is: (net operating income)/(purchase price or market value) = cap rate.
The higher the number you get, the more profitable the property. Any property with a less than 7% cap rate may not be a good investment.
Cash-on-Cash Return
The cash-on-cash return tells you how much money you're getting back on what you've invested. If you financed the property, this number gives you the best way to see the money you're getting out of your property based on what you put in.
The equation is: (net annual income on property)/(total cash invested)
In a nutshell, working out the cap rate tells you how good of a deal you're getting. The cash-on-cash return tells you the exact return on the money you invested.
Putting It All Together
You can conduct a rental analysis on a prospective investment or a property you already own. Many things factor into how much a property is worth and what it costs to keep them maintained (such as support animals or pets in a rental property).
If you'd like to learn more about portfolio management, or are looking to hire a North Carolina property management company to help manage your properties, contact us today.
