Why is this rental property software different?

The primary difference between RealVal and other rental property software is how RealVal forecasts operating expense, rental income, repair costs and the cost of property improvements

Contributions: One completely unique feature of this rental property software is that it estimates how much additional money you will have to invest in the property to keep it operating. That is, it identifies years when the property's expenses might exceed its cash flow. These are years when you will have to make an additional investment (contribution) out of your own pocket to make up for the shortfall. For example, let's say you are looking at an investment property that is going to need paint, a new roof and a new HVAC system at some future date. This software will help you estimate both when these repairs are likely to be needed and what these repairs will cost in the future, taking inflation into account.

It is not enough to know that a rental property has a good rate of return. You also need to know how much money it might cost to get this rate of return. There might be another property available with the same rate of return that doesn't require a lot of additional investment. Having this information up-front will help you select the best property available. This software provides this information on the Annual Contributions and Accumulated Annual Contributions calculation results screens.

Expenses: Most of the rental property software currently available forecasts the annual expense as a percentage of a property's annual rental income. Unless you own a large number of rental properties with the same characteristics, this approach is statistically unsound and can produce misleading results. For example, assume there is 4 bedroom, 2 bathroom property that rents for $1,500 per month. Additionally, assume that the rent is increased at a rate of 3% per year and the expected the annual expense will equal 10% of the annual rent. Using these assumptions and the expense forecasting techniques used by most rental property software, a graph of the annual expense would look like this:

Notice that the annual expense for the property increases in a nice, smooth pattern. It is easy to understand, easy to calculate, but it does not reflect how this operates in the real world.

For the same property with the same monthly rent and rent increase assumptions, RealVal would forecast the annual expense in the following manner:

Completely different. For comparison purposes, an overlay of the first graph onto the second graph is shown below. Now the two scenarios can be easily compared.

Notice in the first scenario (the blue line on the graph), not enough annual expense for the property has been allocated to years 4, 6, 8 and 9. Not only will this affect the calculation of the estimated rate of return, but these are years that you might have to pay some or all of the expense out of your own pocket. Given this, do you still want to invest in this property? Or is there a better property out there? The bottom line is when you are forecasting future expense, it is of utmost importance that your assumptions and forecasting technique accurately predict both the timing and amount of the future expense. If you oversimplify your assumptions or forecasting technique, you can end up with a situation similar to what is shown above.

Rental income: Most rental property software is designed to use the same simplifying technique as described above to forecast rental income. That is, the software forecasts rental income to increase by some percentage in every year. This will produce a smooth, steadily increasing pattern of rental income. As a landlord, there have been many times when I did not increase the rent every year. This is especially true when I have a really good tenant. It may be more likely that you will increase the rent by some amount every two years or possibly every three years. RealVal can forecast rental income in this manner. When you are forecasting future rental income, your assumptions and forecasting technique must accurately predict both the timing and amount of future rental income. If this is not the case, then you can pay for the oversimplification in the future.

Financing: According to a Bureau of the Census Statistical Brief*,fixed-rate amortized mortgages were far and away the most popular way of financing rental property. Adjustable rate mortgages were a distant second. But why are fixed rate mortgages so much more popular for financing rental property than adjustable rate mortgages? Do they always produce a better overall rate of return? One unique feature of RealVal is that it lets you run infinitely many financing scenarios because it accommodates seventeen different loan types, including interest-only loans. We have found in many cases that a 3-year ARM produces the highest rate of return over a twenty-year period.

U.S Department of Commerce SB/96-1 entitled "Who Owns the Nation's Rental Properties?"

  • Cacahuete Properties, LLC
  • 4880 Lower Roswell Road, Suite 165-408
  • Marietta, GA 30068
  • 404.483.4636