When investing in Seattle real estate, there are many factors to consider when determining the success of a property. One important metric is the return on investment (ROI)! Use ROI to determine the success of a single rental property, or use this metric to compare different properties to determine which investment will generate the most revenue for you.
How does calculating ROI for a financed investment differ from the calculation for cash-paid properties? Our Seattle property management experts give insights below!
A cash-purchased investment property means an investor paid for the property with cash only--no financing. However, not every investor can build a real estate investment portfolio by paying cash for every property.
With financing, investors supply a down payment, and then have an ongoing monthly mortgage payment to retain ownership of the property. Financing a new investment is common practice for investors, but you'll need to consider a few extra figures when calculating the ROI on a rental.
What's the formula for ROI with a mortgage payment as part of the equation? Start with that same $800,000 rental property we used in our cash ROI formula example.
This time, you put down 20% for a down payment on an $800,000 real estate investment property. That amount is $160,000, leaving you with a principal amount of $640,000 to finance.
Closing costs are typically higher for a financed property than when paying cash. For this property, closing costs are 5% of the sale price (or $40,000).
To get this residential property ready for the Seattle Wa rental market, you spend another $40,000 on renovations. So far, your out-of-pocket expenses include:
Hang onto this number as you add ongoing costs associated with the investment's mortgage.
For this property, you took out a 30-year loan with an interest rate of 4%. On the borrowed principal amount of $640,000, you'll pay $25,600 in interest over the life of the loan. On a monthly basis, your mortgage payment of principal plus interest is $1,848.
Your mortgage payments aren't the only ongoing costs of owning and operating a rental property. For this exercise, we'll include an additional $2,250 per month that covers property taxes, utilities, insurance premiums, and other miscellaneous costs.
These expenses bring your monthly out-of-pocket payments to $4,098 (or $49,176 annually).
As you know, owning real estate isn't only about expenses! Your ROI formula includes rental income. For this property, you've found some good tenants paying a rate of $6,400 per month. Annually, you'll generate $76,800 in rental income.
Subtract your annual expenses ($49,176) from the yearly rental property income ($76,800) to get your annual net return of $27,624.
Gather all of these numbers to calculate the return on investment for this Seattle rental property.
Make sure the return on investment for a financed rental property meets your expectations and gets you closer to your long-term financial goals. If the returns on one property are good (but not enough to build the long-term wealth you have in mind), work with a Seattle property management company to manage more rentals and boost ROIs!
What's your ideal ROI? It's the number that helps you reach your goals, and it can be different for every real estate investor.
Remember: not all real estate investments in Seattle are $800,000 homes, and mortgage interest rates and down payments will vary depending on your resources and finances. Find the types of properties that fit your investment strategy, whether single-family homes in higher-end neighborhoods or more affordable housing or apartments in other neighborhoods throughout the Seattle area.
Work with a property management company to find rental properties that fit your long-term strategies, then apply their proven strategies and property management services to maximize returns for your investments. From retaining more quality renters to improving curb appeal and adjusting rental rates, a property manager understands how to help investors make more money while reducing costs!
Whether you see the number you want to see (or not), ROIs will fluctuate over time. A low return on investment isn't permanent and can improve with the right strategies! However, the same is true for good ROIs: maintaining them requires diligence and expert strategies for success.
We hope you've seen how the ROI for an investment when financing with a mortgage is different than the ROI of cash purchase. Calculating your optimal return on investment (ROI) can be tricky, but we’re happy to help you figure out what that number should look like before making any big decisions about your next real estate purchase.
Real Property Associates wants to make sure that each dollar you invest results in optimal returns. With our expert property management services, rental property owners experience better ROIs! Reach out, and let's take a look at the numbers.
Learn more about the ROIs for your investments! Get our free Investment Property ROI Calculator.