8 Rental Property Income Formulas to Learn

As a landlord, understanding rental property income formulas is crucial to the success of your real estate investment.

Rental income is the lifeblood of your investment, and the ability to calculate it accurately and effectively is essential.

In this guide, we'll provide an overview of the most important rental property income formulas you need to know.

We'll explain what each formula means, how to calculate it, and why it matters when it comes to knowing how much you're actually making.

With this knowledge, you'll be better equipped to make informed decisions about your rental property and maximize your investment returns.

So, to begin, let's talk about what we define as rental income.

What Is Rental Income?

Rental income is the money that a property manager earns from renting out a property.

This income can come from monthly rent payments, security deposits, and other fees associated with closing costs along with the rental.

Understanding rental income formulas is essential for property managers to accurately calculate their projected rental income, and ensure that their properties are being managed in the most profitable way possible.

However, there are many different forms of rental income that can be calculated from a single rental property.

Below, we will discuss some of the most important rental income formulas that every real estate investor, landlord and property manager should know.

Top 8 Most Important Rental Property Income Formulas for Property Managers

Knowing how to calculate rental income, as well as other important figures such as cash flow and operating costs, can help you maximize your profits and make better decisions when it comes to your investments.

In this section, we'll provide an explanation of the different rental property income formulas so you can better understand their purpose and implications.

Gross Scheduled Rental Income

Gross Scheduled Rental Income (GSR) is the total amount of rent that a landlord charges for their property.

This figure does not take into account any expenses related to the property, such as taxes, insurance, or maintenance costs.

This is an important number for landlords to track, as it helps them to determine their overall rental income for the year.

In order to calculate rent price GSR, you must first determine the total rent charged for the property.

This can be done by taking the total number of rental units in the building and multiplying that number by the rental rate for each unit.

Once you have this figure, you can then add it together to calculate the GSR.

Net Operating Income

Net Operating Income (NOI) is a figure that helps property owners and managers to understand their profits after taking operating costs into account.

This figure is calculated by subtracting the property's operating costs (such as taxes, insurance, and maintenance) from the Gross Scheduled Rental Income (GSR).

NOI helps property owners and managers to gain a better understanding of their overall profits and property value.

By subtracting the operating costs from the GSR, it helps to provide a more accurate picture of the property's profitability.

Cash Flow

Cash flow is the difference between the rental income and expenses of a property.

This figure is important to track, as it helps property owners and managers to understand how much money is coming in and out of the property each month.

To calculate cash flow, you must first subtract the operating expenses (such as taxes, insurance, and maintenance) from the Gross Scheduled Rental Income (GSR).

The resulting figure is the cash flow for the property.

Cash flow is important to track, as it helps property owners and managers to understand their overall profitability.

By tracking cash flow, you can better understand how much money is coming in and out of the property each month and make better decisions when it comes to investments.

Cap Rate

Cap rate refers to capitalization rate and to helps property owners and managers to understand the return on their investment.

It is calculated by dividing the Net Operating Income (NOI) by the purchase price of the property.

This figure helps to provide a better understanding of the overall profitability market value of the property and can be used to determine whether or not a property is a good investment.

Cap rate is an important figure to track, as it can help property owners and managers to make better decisions when it comes to investments.

By understanding the cap rate of a property, they can determine whether or not it is a good investment and make better decisions when it comes to their investments.

Gross Potential Rent (GPR)

Gross Potential Rent (GPR) is the total amount of rent that a property can generate if every unit is rented out at market rent, without accounting for any deductions.

It's important to note that GPR only represents the maximum amount of rent that a property can generate, and it's not an accurate reflection of the actual rental income.

To calculate GPR, you need to multiply the gross rent multiplier the number of units in the property by the market rent for each unit.

For example, if you have a 10-unit apartment building and the market rent for each unit is $1,000 per month, the GPR would be $10,000 per month or $120,000 per year ($1,000 x 10 units x 12 months).

GPR is an important metric for property managers because it provides them with a baseline for projecting the potential rental income of the property.

It's also used to calculate the Net Operating Income (NOI), which is a key metric used by real estate investors to evaluate the profitability of a property.

Effective Gross Income (EGI)

Effective Gross Income (EGI) is the income generated by a rental property after deducting vacancies and credit losses, but lost rental income before deducting operating expenses.

EGI provides a more accurate representation of the actual income generated by the property.

To calculate EGI, you need to subtract vacancies and credit losses from GPR. Vacancies refer to any units that are unoccupied, while credit losses refer to any unpaid rent.

For example, if you have a GPR of $120,000+ per square foot per year and there's a 5% vacancy rate and 2% credit loss rate, the EGI would be $108,000 per year ($120,000 x (1 - 5% - 2%)).

EGI is a crucial metric for property managers because it provides them with a more accurate representation of the actual income generated by the property.

This information is essential for making informed decisions about operating expenses and evaluating the overall profitability of the property.

Some common expenses that can be deducted from GPR to calculate EGI include vacancy and credit loss reserves, concessions, and bad debt expenses.

Cash-on-Cash Return (CoC)

Cash-on-Cash Return is a vital metric in rental property investment, representing the return on investment based on the cash invested.

In other words, it is the ratio of the cash flow received on the rental property to the cash invested in the property.

It is expressed as a percentage, and property managers can use it to evaluate the performance of their own rental properties and property investments.

To calculate the Cash-on-Cash Return, we divide the annual cash flow by the total cash invested in the property.

For instance, if an investor purchased a rental property for $300,000, made a down payment of $60,000, and financed the remaining amount through a mortgage, then their total cash investment would be $60,000.

If the property generated an annual cash flow of $9,000, then the Cash-on-Cash Return would be 15% ($9,000/$60,000).

Cash-on-Cash Return is an essential metric for property managers to evaluate investment opportunities.

It helps them determine whether the investment is generating enough cash flow to cover expenses and generate a profit.

Property managers can use this metric to compare different investment opportunities and choose the one that provides the best return on investment.

For example, suppose a property manager is evaluating two investment opportunities. One property has a Cash-on-Cash Return of 10%, while the other property has a Cash-on-Cash Return of 15%.

In that case, the property manager should choose the property with a higher Cash-on-Cash Return as it provides a better return on investment.

Return on Investment (ROI)

Return on Investment is another crucial metric in rental property investment. It measures the amount of return on a rental market investment relative to the initial investment.

ROI is expressed as a percentage, and property managers can use it to evaluate the profitability of their rental property investment.

To calculate the Return on Investment, we divide the net operating income by the initial investment.

For instance, suppose an investor purchased a rental property for $300,000 and made a down payment of $60,000. If the net operating income of the property is $30,000, then the Return on Investment would be 50% ($30,000/$60,000).

Return on Investment is vital for property managers as it helps them evaluate the profitability of their rental property and investment properties.

Property managers can use this metric to compare different investment opportunities and choose the one that provides the best return on investment.

For example, suppose a property manager is evaluating two investment opportunities. One property has a Return on Investment of 40%, while the other property has a Return on Investment of 50%.

In that case, the property manager should choose the property with a higher Return on Investment as it provides a better return on investment.

Conclusion

Knowing about most, or even some, of these formulas can allow you to make way more informed decisions. Decisions that make a real impact on your business.

To learn more about other vital elements of property accounting like accurately calculating rental income, be sure to read on through the rest of our comprehensive property accounting hub to the next topic.

‍