To compare the profitability of investment properties, whether they are single-family homes, multifamily houses, large apartment buildings or luxury high-rise condos, real estate investors developed a formula. This formula is known as "cap rate" (officially it's "capacity rate"), and it is arguably the most important measurement of how much a property returns on its investment.

Calculating real estate cap rates allows investors to compare properties in different areas by employing the same criteria to estimate their return on investment. It also emphasizes the importance of controlling operating costs. Unnecessary operating costs will lower rental returns, but if those expenses can be controlled, cap rate and profits rise.

When using a real estate cap rate calculator, be sure to check that all costs are included and that a consistent formula is applied. For example, some calculations fail to take into account vacancies, which are inevitable in the rental market.

What constitutes a good cap rate depends on investment goals, and can vary from region to region in the country. Some strive for a cap rate as high as 10 percent, but in a competitive market that is more difficult to achieve, and properties with these rates of return are often in less desirable neighborhoods, which pose higher risks. These days, a cap rate of 5–6 percent for single-family rentals in many hot markets is a more reasonable expectation. Some investors believe that properties that have a 7–8 percent cap rate offer a good balance of risk and stability.

In general, higher cap rates have a higher upside, but there are usually pitfalls associated with them, including purchases in areas where turnover is higher, tenants who rely on government subsidies, amenities are scarce, and quality of life issues like crime are an issue. Lower cap rates are to be expected in more stable neighborhoods, where returns are likely to be more predictable, but investors can look for greater appreciation on the value of a property.

But measuring the cap rate does not tell an investor all that needs to be taken into account, because it does not factor in leverage, the possibility that a property will increase in value, the time value of money, and future cash flows from property improvements and other factors.

There are benefits associated with single-family rental homes that can ease the tax burden. Among the expenses that can be deducted are:

• Cleaning and maintenance
• Mortgage interest
• Insurance costs
• Marketing budget for a property
• Property management fees
• Fees charged by a condo or homeowners association (HOA)
• Property taxes
• Services the investor pays for (gas, gutter cleaning, etc.)
• Professional fees associated with income property, such as legal expenses or budget keeping

There is also a primer on the 20 percent Qualified Business Deduction, one of the hidden tax benefits related to rental property ownership. And there is a complete list of 31 tax deductions that are available to landlords that are often overlooked.

To avoid paying capital gains taxes when it comes time to sell a property, a seller can execute a 1031 exchange, which shields the profits from the sale of a property if it is used to buy another property of equal or greater value. But there is a time limit of 180 days for the purchase of a new property, which can put pressure on a buyer to accept a less desirable deal.

There's yet another tax break for rental property owners known as the Qualified Business Income (QBI) deduction, which allows deductions of up to 20% off taxable rental income. The QBI has a threshold of $315,000 for married taxpayers and $157,000 for everyone else. Any income that falls below the threshold is allowed the full 20% deduction. Those who make more than the threshold can still get the deduction, but it's a new and complicated deduction so a tax professional should offer guidance.

Rental property provides an investor with several potential passive income streams. Rent is collected monthly, an investment property appreciates over time; equity in a home accrues over time, which can be used to get a low-interest loan; and a property may sell for a higher price than what was paid for it.

Before investing in a rental property, consider the demands of being a property manager, which require time and labor. Interacting with tenants, answering emergency calls, and dealing with vacancies can be stressful. Some responsibilities will include:

• Tenant Management — Finding tenants, screening tenants, drawing up legal lease contracts, collecting rents, and evicting tenants if necessary.
• Property Maintenance — Repairs, upkeep, renovations, emergencies and more.
• Administrative — Bookkeeping, setting rent, taxes, paying employees, budgeting, etc.

A property manager can handle these tasks, but they charge 4–12 percent of the gross rents, which can be a lot if there is only one property in a portfolio. Or the individual investor can contract with a property management company to do the work since it offers all the services of a traditional property manager at a lower cost by leveraging technology and artificial intelligence.

There are various ways to calculate a property's value using rental income, but there are two quick and easy ways to estimate potential net income:

• 50% Rule: This estimates that expenses will eat up half of gross income. The other 50 percent can be used to pay off a mortgage, and what's left over will be net operating income. This method gives a rough idea of income stream and potential profit.
• 1% Rule: Gross monthly rental income, meaning the amount an individual makes before taxes, should be at least 1% of a property purchase price, after repairs.

Professional management is the all-in-one platform and trusted partner for growth-minded investors interested in single-family rental properties. Powered by technology and trusted local experts, we educate and empower believers in this asset class to build wealth remotely and confidently.

We believe we're the best property management company for residential real estate investors.

• Best-in-class technology: The investor portal makes it seamless for investors to approve service requests, communicate with their property manager, and monitor performance metrics in real time. With the platform, investors can say goodbye to spreadsheets: the app provides powerful insights and reporting on each property's cash flow, YTD earnings, service requests, new leases or renewals, and more. Accessible on both mobile and desktop, it provides visibility on a property or an entire portfolio all-in-one place.
• Upfront, flat-fee pricing: We charge simple, flat, and monthly rates rather than an overall percentage of rent. Whether a property is leased for $2,000/month or $5,000/month, it's the same monthly price to select your property manager.
• Comprehensive nationwide coverage: With coast-to-coast coverage and local property management experts in 25+ markets (incl. Atlanta, Houston, Dallas, Las Vegas, Charlotte, Phoenix, etc.), we support investors with geographically diversified portfolios. Whether all properties are in one location or multiple spread across different cities throughout the U.S., we support investors by keeping all their properties under one property management company to realize the benefits of passive income.
• More than just a typical property management company: For real estate investors who want to continue to build wealth through single-family rentals, being the all-in-one solution that makes investing easy, we support the end-to-end journey of investing in single-family rentals, so investors can buy, finance, manage, insure, or sell their properties, all in one place.