Calculate Income and "Cap Rate"
1. Determine how much rent this property can earn in a year.
If it's rented already, you have that number. Otherwise, research local rental values for similar homes to come up with an estimate.
2. Determine the annual expenses created by this property. This includes:
- projected vacancy rate (5-10% of annual rent is typical)
- utilities paid by you (water? garbage? Some localities require landlords to pay certain ones.)
- repairs (new roof, new furnace, siding repair, emergency plummer? These things will come up. 1-3% of the home's value is a good estimate. I use 3% since I bought a foreclosure, and assume those numbers higher. If your home is newer, you may use a lower percentage.)
- property taxes
- management fees (if you use a rental management company)
- Annual Rent minus Annual Expenses
- Mine is: 17400-9800= 7600 (roughly)
- Divide net income by cost of property.
- Mine is: 7600/102500= 7.5% (approximately)