How to calculate your ROI for your property’s rental income? How to determine whether a property worth or not to be invested as rental income property by using formula calculation? To sell or keep your property based on rental income generated?
Case Study: How to Calculate Return Profits on Rental Property Investment
Property Profile
Property Type : Serviced Apartment
Size : 821 square feet
Purchase Price : $ 235,900.00
Down Payment : $ 23,590.00
Home Loan Amount : $ 212,310.00
Home Loan Installment : $ 1,173.00 per month
Gross Rental : $ 2,200.00 per month
Expenses : $ 832.37 per month
- Service Charges = $ 164.05
- Sinking Fund = $ 16.79
- Quit Rent = $ 2.85
- Assessments = $ 23.51
- Fire Insurance = $ 16.00
- Property Agent Fees = $ 183.33
- Government Tax for Property Agent Fees = $ 9.17
- Tenant move in/out where 1 or 2 months rental income maybe lost = $ 366.67 (Assumed lost 2 months = $ 4,400. Therefore, Extra Cost per month = $ 4,400 / 12 months = $ 366.67)
- Repairs = $ 50
- Total Expenses per month = $ 832.37 per month
Nett Rental = Gross Rental – Expenses
= $ 2,200.00 – $ 832.37
= $ 1,367.63
Monthly Cash Flow = Nett Rental – Home Loan Installment
= $ 1,367.63 – $ 1,173.00
= $ 194.63
Other Assumptions:
a) No Tax Implications on the Rental Income or on Disposal of the Property
b) No change in the rental rates, service charges or interest rates
How to Calculate Rental Yields
Analysis: Let’s compare to a Fixed Deposit (FD) at 3% per annum, this property’s rental yields at 6.96% is a good investment. As a guideline, the rental yields in property must be more than double the existing Fixed Deposit rates. Properties take longer time than FD to cash out because properties are not liquid assets. Besides, properties involved with numerous property and management issues. Therefore, double the returns of FD rates in rental property investment are a reasonable benchmark.
How to Calculate Cash on Cash Return
This formula is mainly to calculate your yearly Nett Cash Inflow from the investment against your initially Cash Outflow which is the Down Payment.
Nett Cash Flow = Gross Rental – Home Loan Installment – Expenses
= $ 2,200.00 – $ 1,173.00 – $ 832.37
= $ 194.63
Analysis: Based on the result, my initial cash outlay of $ 23,590.00 for the down payment is now giving me returns of $194.63 per month or $ 2,335.56 per year or 9.9% per annum. I feel satisfy with the return rates of 9.9% p.a. Bear in mind, the rental income is not the only advantage in property investment. Do not forget the leverage power and capital appreciation in the property investment. Once adding everything together, the investment really sounds awesome! Please be reminded the formula is not applicable when Nett Cash Flow in either negative or zero figures.
How to Maximize your Rental Income
If you are looking forward to maximize your investment returns in rental properties, please look carefully on the formula given on above and the inputs. You may notice that most of the inputs example quit rent, assessment, fire insurance and etc are fixed. In another word, nothing much we can do on it. From the figures shown, the expenses on Property Agent Fees and cost of property stay vacant without tenant are some of the major factors affecting the result of the rental return profits. These areas are something controllable and worth for us to put more afford on it to ensure the maximum returns profit.
So, you get my points?
Rent out property continuously and consistently by yourself to maximize the returns profit!
Happy Investing!
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{ 12 comments… read them below or add one }
previously, i planned to do this kind of investment but now no more cos my personal calculation tell me not worth
well, i will say its very depending on your financial status, your financial stratergy and also your financial objective as there are so many investment tools are available in the market. So, whats your favorite investment tools?
Wow, the gross rental is quite high. I don’t think it would be easy to find such a good deal. If people are able to rent at such price, they could have buy a house of their own.
Am I correct?
I am looking at a rental property which I would also live in. The bottom floor rents out for 2250 a month and I would have the entire upstairs to myself. However,the mortgage will be about 2300 a month and I will have to pay taxes and utilities and everything on top of this equating to about 3000 total a month. I realize I would be on the hook for 750 a month but can also raise the rent easily to 2500. It is an older house located next to a school and seems to be easily rented. The owner now has been renting rooms for 35 years. Wondering what your take is on the house and if it might be worth it?? Thank You
I find this information very informative. However, I do have a few questions regarding your expense calculations. Shouldn’t some of these expenses be paid by the tenants (service charges, fire insurance)?
What about a new house?Should i rent it after doing some basic renovation for kitchen and living room??Monthly installment RM730. Small house with 3 bedrooms and 2 toilets.Im single n live with parent.
hi, i managed to find an apartm juz nxt to the private college.118k v rental 900 per month.The returns are good, but the problem is the bank valuation is much lower than the purch price. I think mayb is bcoz of it is located at negeri sembilan. what do u think? anyone plz comment bout it…thanks a lot
u dont incl the cost of the MLTA? its diff from fire ins rite
Hi, found a place near private collage. 270k rental 1800. The returns are good but worried about appreciation as it has not appreciated much all these years. Is it still worth to invest?
@Valerie Just to clarify, Condo or landed? I believe is condo. Yield is good but not best. Usually I take net-yield-after-tax for consideration.
Thanks for putting this together. In my experience, the biggest step you can take to minimize the chances of failure when investing in rental property is to first produce a realistic analysis of the expenses and income the property will generate.
Yup, in certain extend you are right at your point. They might able to buy their own house with the rental paid. Let’s see which type of people who are still preferred to rent instead of buying a house for their own stay:
1. People who are not ready to commit themselves to buy a house. (This will be monthly commitment for easily 20 or 30yrs!)
2. Expatriates who are basically not stationed here for long-term.
3. Couples who are still not ‘confirm’ on their relationship commitment and right area to locate themselves for future life.
4. Freelancer or Soho or young businessman who always prefer for quality lifestyle (certainly including their accommodation)
P.S: Try to think out of the box. Forget about our previous college or university life where everybody squeezes into one house to save rental. I scratched my head before too and asking why people are will to pay few thousand to rent a house instead of buying one. Due to my nature of works, I have seen so many tenants are paying for 3k, 5k or even 9k for a smaller unit. But location is supreme! Basically, LOCATION determines the rental!