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Methods Used to Calculate Returns on Rental Properties

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rental propertyInvesting in rental properties might seem like the best plan to get constant income. This, unfortunately, is not that straightforward. It takes more than simply buying a property and getting a tenant to reap the benefits.

There are different methods rental management experts in Denver will use to calculate the projected returns of your investment. This way, you are fully aware of how much you stand to make and can hence make an informed choice. Here are some of the calculation methods for rental property returns.

Capitalization Rate

This rate is your investment’s net operating income divided by its purchase price. An individual cap rate is used by property appraisers and lenders to assess the value of a property.

The market cap rate gives a general idea of the area’s property prices based on recent transactions. The cap rate is considered the most reliable value estimate of your rental property returns.

Gross Rent Multiplier

This ratio estimates the value of your rental property. In the calculation of the gross rent multiplier, the total projected rent and sales price of the property are the two primary elements considered.

There are two categories of gross rent multipliers, including monthly and annual. The gross rent multiplier method does not, however, consider a property’s operating costs.

Net Operating Income

This is equivalent to your property’s total annual income, excluding the total operating expenses and vacancy allowance. The income in a net operating income calculation also includes vending and laundry receipts, parking fees and others, besides the house rent. The net operating income value can also be used in the computation of cap rates.

Rental properties are investments that require tact to benefit from. Getting the best property management company to handle the calculations above is vital. This way, do not have to worry about no regretting your investment and suffering losses.

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