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Rental Income Calculation Methods

Rental income calculation is a crucial aspect of property investment, allowing investors to determine their potential earnings from rental properties. There are several methods used to calculate rental income, each with its own set of assumptions and complexities. In this article, we will explore the various methods used to calculate rental income, enabling investors to make informed decisions about their investments.

Gross Rental Income Calculation​

Gross rental income is the total amount received from tenants before any deductions or expenses are taken into account. This method involves multiplying the monthly rent by 12 to obtain the annual gross rental income. For example, if a property has a monthly rent of $1,500, the annual gross rental income would be calculated as follows:

  • Monthly rent: $1,500
  • Annual gross rental income: $1,500 x 12 = $18,000

Net Rental Income Calculation​

Net rental income, on the other hand, takes into account various expenses such as property taxes, insurance, maintenance, and management fees. This method provides a more accurate picture of an investor's potential earnings from a rental property.

  • Annual gross rental income: $18,000
  • Property taxes (5%): $900
  • Insurance (2%): $360
  • Maintenance (3%): $540
  • Management fees (10%): $1,800

Total deductions: $3,600

Net rental income: $18,000 - $3,600 = $14,400

Cash Flow Calculation​

Cash flow is the amount of money available to an investor after deducting all expenses from their gross rental income. This method takes into account not only the net rental income but also other sources of income and expenses.

  • Net rental income: $14,400
  • Other income (e.g., parking or laundry): $1,000
  • Total deductions (property taxes, insurance, maintenance, management fees): $3,600

Cash flow: $14,400 + $1,000 - $3,600 = $11,800