Making investments, particularly investing in rental properties, can be one of the most profitable and secure means of passive income.
Owning and running rental properties will augment your wealth by providing lengthy appreciation, monthly cash flow, and tax benefits, allowing you to save for a pension, social situations, and other goals.
It may seem difficult to know where to start, but rental real estate investing is for everyone, irrespective of background, experience, age, status, etc.
Many property investors will admit that after their first interaction with real estate, the most difficult part of breaking ground is picking the right property and determining whether the investment will be profitable in the long run.
Let's go over how to calculate a property's return on investment (ROI).
What You Need in Order To Calculate the ROI
Now that you've found a suitable rental property which you consider would be ideal, how do you know if it'll be a worthwhile option? This is where calculating the return on investment (ROI) comes in.
ROI is a metric for determining the profitability of an investment, or in other words, the potential return on investment compared to the cost of the rental property.
Here's a rundown of some terms you'll need to figure out the ROI:
• Information About the Property: It encompasses the value of the property, the cost of repairs, the total area, and the number of bedrooms.
• Mortgage Details: The terms of the loan, down payment, interest rate and applicable closing costs, are all examples of this.
• Rental Income Details: Determine the monthly rental income, as well as other monthly income and the expected vacancy rate.
• Monthly Rental Expenses: You'll need to know how much you are likely to foot in terms of monthly maintenance, repairs, utilities, HOA/dues, and property management will cost.
• Annual Rental Expenses: The annual property taxes and insurance costs will be included in this figure.
Understanding all of these specifics about a prospective rental property will assist you in determining whether it will be a smart buy that meets your investment objectives.
How to Calculate the ROI
You're fully prepared to calculate the ROI once you've gleaned all of the pertinent information about a property.
Some of the key figures you'll need to calculate are listed below. One could also use a rental property calculator to figure out the return on investment.
• Net Operating Income (NOI): The net operating income is abbreviated as NOI. It indicates the return on your investment. You can figure it out by subtracting the gross income from the property's operating expenses.
• Cap Rate: The capitalization rate is another name for this. As a representation of your rate of return, it aids you in easily gaining insights to correlate rental investment vehicles. It's calculated by multiplying your NOI by the property's cost.
• Cash-On-Cash Return: This is the expected return on your investment in the rental property. To figure what this number is, you divide the yearly after-tax cash flow by the actual price you paid during the acquisition of the property.
• Annual Gross Rent Multiplier: This is also known as the GRM, and it aids in determining the rental investment's worth. It can, for example, assist you in determining whether the asking price is fair. Divide the total sales price by the annual gross rent to get the GRM.
• Annual Cash Flow: Annual cash flow is calculated by the net operating income minus debt. This is how much you will profit (or lose) from your rental annually after all expenses and mortgage payments are covered.
To calculate ROI, subtract the profit from the cost of the investment and divide the result by the value of the investment:
ROI = (gain on investment - cost of investment) / cost of investment
Say, if you invested $400,000 in property and sold it later for $700,000, you’d employ the above criteria in calculating your ROI:
(700,000 - 400,000 = 300,000) / 400,000 = 0.75
Hence, your return on investment was 75%.
Cash Transactions vs. Financed Transactions
If you paid cash, the ROI calculation is a little easier to do. You'll figure out how much money you'll make in a year. This is calculated by subtracting your property income from your expenses. After that, divide the result by the amount you paid for the house in cash.
If you used a mortgage to purchase your home, you must include the cost of the loan in your ROI calculation. This means that your total cost will include your down payment, any closing fees, and any remodeling or improvement expenses.
You'll have to deduct the cost of your monthly mortgage payments, as well as other year-round costs when calculating your annual return.
What is a Good ROI in Real Estate?
Many investors use the S&P 500's average returns, which have been around 8% for the past 50 years, as a guideline. However, any finance metric between 5 to 10% is considered a good ROI for your rental investment.
It's a wise idea to analyze the return of your property through different metrics. Keep the profitability of a property — as well as your investment strategy — in mind as you begin your landlord journey, and you should see a positive return on your rental portfolio.
If you’re still confused, get in touch with Gifford Properties and Management! Our team of real estate professionals can provide rental property owners in Fleming Island and Jacksonville, Florida with management benefits. They can help you manage and grow your investment more effectively.
We have the knowledge, resources, tools, and experience to manage your rental properties in every way. Property owners’ responsibilities are taken over by our competent team at Gifford Properties and Management.
As part of our services, we provide asset management, tenant screening, property marketing, routine property inspections, repairs, and maintenance, as well as addressing resident concerns in your Florida rental home.
We can help you maximize your rental income in more ways than one as a qualified property management company. We accomplish this by ensuring that you take advantage of all available revenue streams, reduce expenses, and perform preventative maintenance.