After acquiring rental property, you’re essentially running a small business, so understanding rental rates is crucial. 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 expenses. The rental rates for your property and operating income is given below

DETERMINING INCOME

Investment property owners often set rent prices based on their desired annual income. Unfortunately, this approach is not always successful. Additionally, San Diego firms offer rental property management services to assist Landlords in determining market rent for their property.

How to Conduct a Comparative Market Analysis for Rental Properties

The comparative market analysis helps set the rental rate or price for each property. The rental rate is determined by comparing your property to leased and currently marketed similar properties. If a landlord insists on choosing a monthly rental rate asking price above market (for 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 (for 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 OPERATING INCOME (NOI)

Property management companies in San Diego and nationwide use a uniform formula to calculate a property’s net operating income. For real estate investments, net operating income earned is the rental rate collected minus vacancy loss and operating expenses. You can calculate this either annually or monthly.

Calculating CAP Rate for Apartment Buildings

Property management companies and investment brokers assess a property’s CAP rate by analyzing its net operating income, which is calculated as NOI divided by property value. This rate, a key factor in gauging return on investment, reflects the property’s cash flow quality and overall value. Contact us today