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How to Calculate the Rate of Return on a Rental Property?

People purchase investment properties with the intent of making money through rental income or selling it after an interval of time. A rate of return (RoR) is the net gain or loss of an investment over a specified time period, expressed as a percentage of the initial cost of the investment. The real estate portal for searching flats for sale in Kerala, luxurykeralaflats.com takes you through the diverse methods for calculating the rate of return on a rental property like a flats in Kerala.

ROI = (Gain from Investment – Cost of Investment)/Cost of Investment

Investment cost = Rs.5,00, 000 

Total profits made = Rs.7,00,000

Rate of return on your investment ROI =((700000 – 500000)/500000)X 100 = 40%

This is the simple rate of return on investment formula. But this gives only a general idea.

The Cap rate and the Cash on cash return are the other methods used to determine the rate of return on a rental property. How you pay for your flat before renting determines which method to use.

Cap Rate Calculation

If the investor pays for the flat fully in cash the capitalization rate (or cap rate)  is used. 

Cap rate is defined as the ratio between a property’s net operating income (NOI = Rental Income – Operating Expenses) and its purchase price. Operating expenses are expenses you can’t avoid like property taxes, property insurance, maintenance, property management, etc. 

The formula for calculating the cap rate is:

Cap Rate = (NOI / Purchase Price) × 100%

Cash on Cash Return Calculation

This method is used when investors take a mortgage or loan to pay for the real estate investment property  The cash on cash return (or CoC, for short) of a rental property is the ratio of the property’s annual NOI and the total amount of cash actually invested in the investment property. So, the formula for calculating the cash on cash return is as follows:

Cash on Cash Return = (Annual Cash Flow/Total Cash Invested) × 100%

If the rental property is bought with a loan and 20% down payment,

Down Payment = Purchase price X 20%

Total cash invested = Down Payment + Closing costs + Remodeling cost

Now considering the monthly EMI for the loan and the rent received from the tenant.

Cash flow per month = Rent – EMI

Net Annual Income = (Rent – EMI) X 12

Cash on Cash Return = (Net Annual Income /Total cash invested) x 100% 

What is a Good Rate of Return on a Rental Property?

Rate of return depends on the size of the rental property, the location, the risk associated with the investment, etc. An average rate of return on investment above 15% is considered good.

As a property owner, you should be familiar with how to calculate the Rate of Return on a Rental Property. We at luxurykeralaflats.com hope that this insight has been helpful to you. Check out flats for sale in Kochi, Kerala at luxurykeralaflats.com.

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