In the latest installment in our webinar series, we discussed how we at Keyrenter Tulsa calculate rental return rates for properties. During the webinar, we performed a walk-through of the process which has been saved to our YouTube channel. For more information on this process or the other services we provide, follow us on Facebook!

The rental return rate calculator example we walked through on the live webinar was for a single-family property. However, this process is easily duplicated. It can be used to calculate the rental return rates for duplexes, multi-family properties, and more.

At Keyrenter Tulsa, we use an excel model to calculate rental return rates. There are much more complicated ways to calculate rental return rates for multi-family properties, lease durations, etc. The model we walked through during the live webinar was a simple financial model. We make several assumptions using this model which will be covered throughout this post.

85% LTV Assumptions

The first assumption we make using this rental return rate calculation method is that you are using 85% debt. This means that your loan to the value of the property is 85%. This graph essentially forms the inputs we will need to plug into the rental return calculator. The items we address for this portion of the model include the following:

Purchase & Repair Assumptions

This portion of the graph includes the property purchase price, LTV percentage (85% for this model), and downpayment. It also includes closing costs, repairs, and finally the total overall cost of the property. 

Loan Assumptions

Included in this section are the amortization schedule (years) and the interest rate for the loan. This will not be an accurate total for the loan. You will likely encounter various bank fees and other charges during the duration of the loan. If you wish to account for those fees, you can establish an estimated total to include. We did not account for these additional loan fees in our calculation model.

Rent Assumptions

This section includes the projected monthly rent, management fee for the rental company (percentage of the monthly rent), leasing fee, and yearly lease renewal fees. In this model, we assume that each tenant will occupy the property for 24 months. Because of this, our calculations account for a leasing fee every other year, with lease renewal fees on the following year. If you are managing the property yourself, you will not need to account for a management fee, leasing fees, or lease renewal fees. You may, however, decide to input other costs associated with rent in this section.

Tax Assumptions

The final portion of this graph is the tax assumptions. This section includes the total tax amount of the previous year and the marginal tax bracket for the property. In the example we shared in the webinar, the previous years’ tax fee was incredibly low due to the value of the property before it was purchased.

However, after making significant renovations and raising the overall value of the property, it is safe to assume that this tax rate will be increased over the following years. This is something to keep in mind while creating your calculation spreadsheet. 

85% LTV Pro Forma

Once we have established the inputs necessary to complete the calculations using the previous assumptions graph, we can move on to the next step in the process. In this pro forma graph, we calculate the rental return rate over a span of five years. These numbers are only approximations. However, we can make accurate assumptions for increases to tax fees, insurance costs, and other charges that will be indicative of the costs that will occur over the next five years.

After you input the rent, vacancy, management fees, principal, interest, taxes, insurance, and other expenses, you will be left with the total of your monthly free cash flow. This monthly cash flow number multiplied by 12 months will provide you with your yearly cash flow for the property. This number, however, is different than your actual rental return rate.

Finding your Rental Return Rate

The total of the yearly rent income for a property minus all fees and charges you incur will provide you with the yearly cash flow for that rental property.

Your actual rental return rate is calculated by adding your cash flow total plus your principal paydown (the amount you have paid on the loan). Your tax benefit is another form of savings that you aren’t paying back. Additionally, your asset appreciation will add to your return rate. 

Tracking Construction Costs

Another graph we create in correlation to the rental return rate spreadsheet is a construction cost graph. In the example we share in the webinar, the property received a renovation that addresses almost every surface in the home. This is not the case for every rental property. 

When creating a graph for construction costs, you can input all of the construction work or repairs that will be necessary to prepare the property for rent. You should include the estimated cost for each project as well as the actual cost once the project is completed. We find it helpful to include the status of the project in this graph. We also like to include the company or individual who is performing the work. 

When you are working on this graph, be sure to build in a buffer of approximately 10% to account for error or unforeseen projects. You will then input this construction cost estimate under ‘repairs’ in the initial assumptions graph. 

When you create an excel model you are able to easily play around with various costs to determine where you will get the most value. In this way, you can find ways to save money during the renovation process. Doing so will improve your rental return rates. We call this value engineering. 

Why You Should Use a Rental Rate Calculator

Using a simple rental rate calculator like the one we use at Keyrenter Tulsa allows you to easily input various changes to the charges and fees for any given property. In doing so, you are able to quickly determine whether a financial decision regarding your property will be to your benefit or not. 

This is incredibly beneficial when you are determining the monthly rental rate for a given property. It also allows you to easily account for changes in taxes which will likely occur after renovating a rental property.

It is important to keep these meticulous records. Doing so will require additional work on the front-end of the project. However, it will ensure that you are properly tracking both your income and investments into any given property. Failing to do so will create problems with unforeseen charges, fees, and uncertain cash flow.

At the end of this webinar, we ran through several scenarios that covered different types of rental situations. Depending on the property type, tax amounts, neighborhood, repair costs, etc., your calculations will fluctuate. Learning the basics of using this type of rental rate calculator allows you to easily use a similar model for any type of rental property situation. If you are interested in using this method for yourself, we are providing a blank copy of our rental return rate calculator spreadsheet free of cost. Contact us directly for further information at [email protected]tulsa.com for your own copy! Be sure to follow us on Facebook for future webinar topics and other updates regarding Keyrenter Tulsa.