How to Calculate the Lease Return on an Investment
- 1). Identify all of the costs and income attributed to owning and managing the property under the lease terms. The costs include the full purchase price of the property, the down payment on the property, the monthly loan payment, and any incidental costs associate with managing the property. The income consists of the monthly rental payments received under the terms of the lease agreement.
- 2). Calculate the net-rental. Subtract the total monthly expenses of managing the property from the total amount of monthly rental income paid under the terms of the lease. For example, if the monthly rental payment on the property is $2,400 and the monthly expense to manage the property is $800, the net-rental income would be $1,600. The equation would be 2,400 - 800 = 1,600.
- 3). Calculate the monthly cash flow for the property. Subtract from the net-rental from the total monthly loan installment payment for the property. For example, if the net-income on the property is $1,600 and the total monthly loan installment payment is $1,400, then the monthly cash flow for the property would be $200. The equation wold be 1,600 - 1,400 = 200.
- 4). Calculate the rental yield on the property based on the net-rental income from the lease. Multiply the net-rental times twelve and divide by the total purchase price of the property and then multiply by one hundred to arrive at the rental yield return under the lease agreement. For example, if the net-rental is $1,600 and the purchase price of the property is $500,00, the rental yield return under the lease would be approximately 3.8 percent. The equation would be [1,600 X 12 / 500,000] x 100 = 3.84.
- 5). Calculate the net cash on cash return for the property under the lease agreement. Multiply the monthly net-cash flow for the property by twelve and than divide this number by the down payment amount for the property and than multiply this quotient by one hundred to arrive at the property's cash on cash return under the lease agreement. For example, if the property's monthly net-cash flow is $200 and the down payment on the $500,000 property is $100,000, then the cash on cash return for the property under the lease agreement would be 2.4 percent. The equation would be [200 X 12] / 100,000) X 100 = 2.4.
Source...