Investing in residential property is an opportunity many take advantage of to build long-term income. However, before investors can purchase a property (or analyze profit), they must understand how to calculate ROI!
Seattle property managers help guide rental property owners and their long-term successes by improving return on investment over time-based on various factors, including making property updates, adjusting rental rates, and finding quality tenants. To determine success, residential real estate relies heavily on return on investment, or ROI, calculations. When you know how to calculate your ROI, you can better measure your success. Here's what investors need to know!
How familiar are you with ROI as it applies to rental property investments? Think of the ROI as a key performance indicator for residential real estate investors. The calculation starts with the amount you invest initially, but your monthly income isn't "pure" profit. Without calculating the return (including ongoing expenses), investors won't have a realistic picture of a rental's performance.
If your expenses outweigh your return, you are simply losing money. However, when your profits are higher than your total costs, you have a positive return.
A Seattle property management professional helps rental property owners calculate returns and apply strategies to improve ROIs that don't meet expectations. When reviewing a rental's ROI, you'll typically see this metric in terms of a percentage. Let's look at a simple example of return on investment with a residential rental property.
You purchase a Seattle residential real estate property at the cost of $100,000. You then turn around and sell that real estate property a few years later for $160,000. Your net gain over those two years is $60,000. When you look at the profit and divide it by the cost, you end up with a return on investment, or profitability ratio, of 60%.
That probably seems simple enough, but there are severe additional things to include in your calculation, along with the purchase and sale prices for an investment asset. With a rental property, investors make a long-term investment that requires upkeep to keep it in excellent condition over time.
When calculating ROI, think about all ongoing costs, including Seattle property manager fees, property taxes, and costs for maintenance, repairs, and upgrades. Every financial aspect and cost to operate a rental property should factor into the calculation. Referring to the example above, if you add in $20,000 for contractors to perform maintenance and repairs, your return drops to $40,000. This is because the initial cost of the property was $100,000, but with the $20,000 increase, the return on investment in this scenario is now 40%.
Aside from costs, income also impacts an investment property's ROI. While it is necessary to spend money to keep up with the property over time, property owners must also analyze monthly rent amounts, renewal rates, quality tenants, and on-time rent collection rates to learn more about the factors impacting a property's ROI. The more you pay to upkeep the property, the more profit you lose without the right strategies in place to generate the income you need for better returns.
Expenses for capital improvements need consideration, as well. You may construct add-ons to the property, renovate bathrooms, finish a basement, and so on. All of these capital improvements will come at a cost—but they are also likely to increase the property's overall value and support monthly rent increases to boost your bottom line.
It is very common for investors to take out a mortgage on the property to purchase a property. Property management professionals also help investors factor in interest costs to calculate ROI when financing a rental property. When you invest in residential rental property, paying cash is always the best option to maximize returns. Still, a Seattle property management team knows this is not always feasible when building a real estate investment portfolio. Include your mortgage payment as an "expense" when calculating returns.
If you're struggling to get an accurate picture of the returns on a real estate investment property, work with a Seattle property management professional to get a better understanding of the formula. With an accurate ROI, a property manager will also help you make critical changes to justify a rent increase, retain more renters, reduce costs, and improve your bottom line!
Calculating ROI for property investment is an important aspect of analyzing a property's success. Real Property Associates is the Seattle-area experts you need to evaluate current properties in your portfolio and target new rentals with the best potential for success. We also apply the right strategies to help investors reach their ROI and long-term income goals.
We're here to help you with our free ROI Calculator! Click to plug in the numbers for your rental property and evaluate your returns.