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Determining rental rates and net operating income for your income property

Determining rental rates and net operating income for your income property

Once you have acquired a rental property, it is important to understand that you are now operating a small business run by one of many San Diego property management companies. Like any business, your profit and loss statement details how much you earn minus how much you spend. In this case you earn rental income and spend property maintenance expense.

DETERMINING INCOME
Many investment property owners determine how much to charge for rent based on how much they would like to make as an income each year. Unfortunately, this approach is not always successful. One of the rental property management services offered by San Diego firms is to help Landlords determine the market rent for their property. A comparative market analysis is the standard approach for determining what rental rate or price to charge for each individual property. This approach determines the rental rate by comparing your property to other similar properties that have been leased, and to a lesser extent the asking prices for similar properties currently being marketed. If a landlord insists on choosing monthly rental rate asking price above market (example $2600), they should be forewarned that each month that goes by without a tenant will create a monthly vacancy loss equal to the above market asking rate divided by 12 months ($2600/12=$216.66). This monthly vacancy loss is then subtracted from the actual monthly rental or market rate achieved (example $2400), to calculate the effective monthly rental rate ($2400-216.66=$2183.33). As you can see it makes better fiscal sense to simply charge the market rate of $2400 to come out ahead income wise.

DETERMINING NET OPERATINGINCOME (NOI)
Property management companies in San Diego and across the nation use the same formula to derive a properties net operating income. For real estate investments, net operating income earned is the rental rate collected minus vacancy loss and operating expenses. Most commonly you will see this calculated on an annual basis, but you may also make the calculations on a monthly basis. Apartment property management companies as well as investment Brokers who manage or sell buildings with multiple units look at net operating income to determine the properties CAP rate (capitalization rate), which is equal to NOI divided by property value. The capitalization is a rate of return which determines the quality of the cash flow and determines the value of the property from a return on investment standpoint.

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