Getting Started: Rental Property Analysis
In the Rental Property Analysis section, we want to understand the rental property as an investment and how it can help achieve your future financial goals.
To help understand the Rental Property we look at 4 things.
- The current Equity and Mortgage for the property
- The Rental Income for the property
- The Rental Expenses for the property
- And finally, the Rental Metrics for the property
The Rental Property Analysis section looks at the rental property on an annual basis, so all values for income, expenses, and mortgage payments should be annual. Anything in grey is either calculated automatically or brought in from the sections in the Discovery phase.
Equity and Mortgage
In Equity and Mortgage we want to understand the value of the property, the mortgage remaining, the interest rate, and the current annual payments. If there is both a mortgage and a HELOC on the property, then these should be combined to get the total debt and payments on the property.
Rental Income
In Rental Income we want to understand the gross rental income and any additional income from laundry, parking etc. Gross rental income is brought in from the Income section in Discovery. We also want to estimate a vacancy rate for the property to anticipate vacancy, delayed payment, time in between tenants, or renovation time. This will depend on the local rental market, but a good estimate is 3% to 5%. This gives us the Total Annual Gross Income.
Rental Expenses
In Rental Expenses we bring in the monthly rental expenses that were entered in the Expenses section in Discovery and multiply by 12 to get the annual expenses.
Rental Metrics
Finally, Rental Metrics are calculated based on the values provided.
Cash Flow: The Cash Flow metric represents the free cash flow from the rental property. Ideally Cash Flow is positive. A negative value means that the rental must be subsidized each month using income from another source, like employment.
Cap Rate: The Cap Rate metric represents the rate of return on the rental property ignoring debt. The Cap Rate looks at Total Annual Gross Rental Income versus the Current Value of the property. It allows rental properties to be compared without the effect of debt/leverage.
Cash On Cash Return: The Cash On Cash Return metric represents the rate of return including debt repayment. This is the Cash Flow plus the Annual Principal Payment versus the Equity. The equity represents the cash tied up in the property and the Cash Flow plus Annual Principal Payment represent the cash being produced by the property. The Cash On Cash Return is only for this year. The Cash On Cash return will decrease as the mortgage is paid off and as leverage is decreased. As you gain more and more equity on the property the cash tied up in the property increases and the Cash On Cash return will change.
Cash on Cash Return Including Appreciation: The Cash on Cash Return Including Appreciation metric represents the same Cash On Cash return calculation as above but now appreciation is included. Appreciation is assumed to be inflation over the long term. The Appreciation helps increase Cash On Cash return, especially when there is a large amount of debt/leverage on the property. As debt is paid off, the leverage decreases, and the Cash On Cash Return Including Appreciation will change. These metrics can be improved in the future if rental rates increase above inflation, or if property appreciation rates increase above inflation, however in the platform we assume an increase with the rate of inflation over the long-term.
