Newbie Rental Proprties Questions that I'm looking an answer for
New to Real Estate · Dubai, United Arab Emirates · Member since 2021 · 2 posts · 0 votes
Hello BiggerPockets community, I'm a new newbie to real estate invsesting and in the past few months I have been learning so much about it so I gathered some questions for topics that I did not understand well and I am hoping that you guys can clear them up for me .
1- What does a vacancy mean in a rental property expenses ?
2-How the right amount of a lease gets define in a rental property?
3- What is right way to calculate Annual Return on investment?
Note! that I have tried my self to calculate the Annual Return on investment with my calculator but it gave me wrong results than that the result mentioned by the book .
@Ali Aldhanhani - Hi and welcome Ali....
1 - On a standard real estate investing calculator "vacancy" is expressed as a percentage rate and is understood as a "negative income - or expense" - and helps you be realistic about the amount of rental income that you can expect from that unit during the year. It's always good to figure in some vacancy - periods when you'll have continuing expenses but no income on that unit. The IRS defines "vacancy expenses" as the costs of managing, conserving or maintaining the property while it's vacant... but that definition has to do with the tax implications of a vacant rental unit.
2 - are you referring to how an actual rental rate gets decided? This will be determined by normal market supply and demand - and researched through property managers, or various online tools that all seek to understand comparable units for rent in any given neighborhood.
3 - there is no "right" way to calculate return on investment (roi) - it varies with the property type and your investing goals. Here are some ROI calculations that are often used:
a. Cap Rate (capitalization rate) - this is your net operating income divided by the purchase cost (helpful in quickly comparing multiple properties - but does not include any financing, assumes a cash purchase)
b. Cash on Cash - this is your cash flow divided by the initial cash invested (downpayment, repairs, closing costs, etc.)
c. Other annual ROI calculations may include such factors as principal reduction, appreciation, as well as tax savings. For example: Cash Flow + Principle Reduction + Tax Savings + Appreciation Cash Invested
Some markets will yield poor cash flow but excellent appreciation.... or vice versa.
Sorry it can get a bit technical - hope this helps.....
@Ali Aldhanhani - Hi and welcome Ali....
1 - On a standard real estate investing calculator "vacancy" is expressed as a percentage rate and is understood as a "negative income - or expense" - and helps you be realistic about the amount of rental income that you can expect from that unit during the year. It's always good to figure in some vacancy - periods when you'll have continuing expenses but no income on that unit. The IRS defines "vacancy expenses" as the costs of managing, conserving or maintaining the property while it's vacant... but that definition has to do with the tax implications of a vacant rental unit.
2 - are you referring to how an actual rental rate gets decided? This will be determined by normal market supply and demand - and researched through property managers, or various online tools that all seek to understand comparable units for rent in any given neighborhood.
3 - there is no "right" way to calculate return on investment (roi) - it varies with the property type and your investing goals. Here are some ROI calculations that are often used:
a. Cap Rate (capitalization rate) - this is your net operating income divided by the purchase cost (helpful in quickly comparing multiple properties - but does not include any financing, assumes a cash purchase)
b. Cash on Cash - this is your cash flow divided by the initial cash invested (downpayment, repairs, closing costs, etc.)
c. Other annual ROI calculations may include such factors as principal reduction, appreciation, as well as tax savings. For example: Cash Flow + Principle Reduction + Tax Savings + Appreciation Cash Invested
Some markets will yield poor cash flow but excellent appreciation.... or vice versa.
Sorry it can get a bit technical - hope this helps.....
Thanks very much @Tim Johnson, your clarifications for my questions were very helpful I really appreciate it, Also No worries about the technical part as I think it is very important to master and understand as they can be vital to our long term real estate investing career.