How to Calculate Rental Income
A great way to generate an income is through rental properties. However, knowing how much you’re going to generate is important. You need to calculate the income generated from your rental property; this includes rent from tenants, operating costs, repair costs, tax, and other property-related costs. Whether you own one property, an apartment, or multiple investments, knowing how to accurately calculate your rental income will help you make better financial decisions. Within this article, we’ve shown you how to calculate your rental income step by step with easy examples.
What Is Rental Income?
Rental income refers to the income a property owner gets from letting their tenants use their property. Typically, you will have monthly income through rent payments, but it can also include extra rental costs agreed upon in the rental agreement.
Common sources of rental income include:
- Monthly rental payments
- Parking fees
- Storage fees
- Extra property facilities
- Additional agreed rental costs
Not all of your rental income will be what you actually gain from your property. You need to take into account your associated property costs.
How To Calculate Rental Income
To calculate your rental income, you will want to take your Total Rental Income and subtract any costs. The basic formula for rental income is:
Net Rental Income = Total Rent – Operating Costs
An example of rental income is, if you own an apartment that earns you $1,500 per month, your rental income would be:
$1,500 x 12 = $18,000
If you have annual operating costs of $5,000, your net rental income would be:
$18,000 – $5,000 = $13,000
This means you annually gain $13,000 of net rental income from the property before considering other costs like principal mortgage payments and income taxes.
How To Calculate Rental Income Step By Step
Calculate Monthly Rental Income
Find out how much your tenants are paying in rent monthly. If you have multiple properties, add up your rental income.
Example:
- Property A = $1,000
- Property B = $1,200
- Property C = $800
You will have a total monthly rental income of $3,000. Multiply this by 12 to give you the total you could receive in rental income:
$3,000 x 12 = $36,000.
This assumes there are no vacancies and tenants are paying full rental.
Account For Vacancies
There is no guarantee your rental properties will always be rented throughout the year. You may have tenants leaving, late payments, and waiting to find new renters. This will impact how much you will earn from rental.
If your property earns $1,500 per month but has a 1-month vacancy, you will have:
$1,500 x 11 = $16,500
Taking vacancies into consideration gives you a realistic idea of how much your property could actually earn.
Calculate Property Costs
Operating costs refer to the costs you require to run and maintain your rental property. Common costs include:
- Repairs and maintenance
- Property management cost
- Insurance
- Tax
- Utility bills
- Advertising and tenant screening costs
- Homeowners association fees
Track your costs throughout the year. Knowing exactly how much you are spending on your property will help you calculate your actual rental profit.
Subtract The Costs
Now you know how much you should be making from rental and the total costs, you can subtract this.
Example:
- Rental Income – $18,000
- Maintenance – $1,000
- Insurance – $800
- Taxes – $2,000
- Management – $1,200
- Additional costs – $500
Total – $5,500
Net Rental Income – $12,500
This example shows that you will get a total of $12,500 net rental income annually from your property before any financing and income tax.
How To Calculate Rental Yield
Rental yield will help property owners see how much rental income they’re getting in relation to how much they paid for the property. The formula for gross rental yield is:
Gross Rental Yield = (Annual Rental Income / Value of Property) x 100.
If your property is worth $200,000 and you generate $18,000 rental income annually:
($18,000 / $200,000) x 100 = 9%
You will have a 9% gross rental yield. You can also calculate a net rental yield by taking the operating costs away. This will give you a better indication of how the property is performing as it takes costs of maintaining your property into consideration.
Top Tips For Managing Rental Income
Managing your rental income effectively will help you avoid any unexpected issues with your cash flow. Top tips include:
- Keep track of all your payments. Know exactly how much rent you are getting from your tenants.
- Keep track of your costs. Keep any receipts relating to repairs, insurance, taxes, etc.
- Budget for vacancies. Prepare your budget to have some funds for your property being unrented.
- Check rental rates. Ensure you are getting a competitive rate compared to similar properties in your area.
- Maintain your property. Have regular checks and repairs to help minimize risk to your investment.
- Set up an emergency fund. You want to have some money to cover any sudden repairs and other costs.
Final Thoughts
Knowing how your property is performing financially is an important aspect of property investment. By calculating your monthly rental income, estimating vacancies, tracking your operating costs, and identifying rental yield, you can make better decisions regarding your investment.
Knowing how to calculate rental income will help you get realistic ideas about your finances. Be accurate with your recordings, look at your costs regularly, and ensure you are receiving enough rental income from your property to help your long-term investment goals.