How can you compare rental income for properties in different locations?

2 Calculate net operating income

The second step to compare rental income for properties in different locations is to calculate the net operating income (NOI) of each comp. NOI is the difference between the gross rental income and the operating expenses of a property. Gross rental income is the total amount of rent collected from tenants, plus any other income from fees, parking, laundry, etc. Operating expenses are the costs of running and maintaining the property, such as utilities, repairs, maintenance, insurance, property taxes, management fees, etc. NOI does not include mortgage payments, depreciation, or capital expenditures. To calculate NOI, you can use the following formula:

NOI = Gross Rental Income - Operating Expenses

3 Adjust for location factors

The third step to compare rental income for properties in different locations is to adjust for location factors that affect the rental income potential of a property. Location factors are the external factors that influence the demand and supply of rental units in a specific area, such as population growth, income level, employment rate, crime rate, school quality, transportation access, amenities, etc. Location factors can have a positive or negative impact on the rental income of a property. For example, a property in a high-demand area with low vacancy rate, high income level, and good amenities can charge higher rent than a property in a low-demand area with high vacancy rate, low income level, and poor amenities. To adjust for location factors, you can use a location multiplier, which is a percentage that reflects the difference in rental income potential between two areas. You can find location multipliers from online sources, such as NeighborhoodScout, or from local real estate experts. To apply a location multiplier, you can use the following formula:

Adjusted NOI = NOI x Location Multiplier

4 Compare cash on cash return

The fourth step to compare rental income for properties in different locations is to compare the cash on cash return (CoC) of each comp. CoC is the ratio of the annual NOI to the total cash investment in a property. Total cash investment is the amount of money you pay upfront to buy a property, including the down payment, closing costs, and any renovation costs. CoC measures the return on your cash investment in a property and indicates how quickly you can recover your initial investment. To calculate CoC, you can use the following formula:

CoC = (NOI / Total Cash Investment) x 100%

5 Compare capitalization rate

The fifth step to compare rental income for properties in different locations is to compare the capitalization rate (cap rate) of each comp. Cap rate is the ratio of the annual NOI to the current market value of a property. Current market value is the amount that a property would sell for in the current market conditions, based on recent sales of similar properties in the same area. Cap rate measures the return on your total investment in a property and indicates how much income a property can generate relative to its value. To calculate cap rate, you can use the following formula:

Cap Rate = (NOI / Current Market Value) x 100%

6 Compare rent to value ratio

The sixth step to compare rental income for properties in different locations is to compare the rent to value ratio (RV) of each comp. RV is the ratio of the monthly gross rental income to the current market value of a property. Monthly gross rental income is the same as gross rental income, but divided by 12. RV measures the rental income potential of a property relative to its value and indicates how much rent a property can charge per dollar of its value. To calculate RV, you can use the following formula:

RV = (Monthly Gross Rental Income / Current Market Value) x 100%

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?