How Different Factors Impact ROI for Rental Properties in Seattle

Your return on investment will grow if you fully factor in the critical considerations of being a property owner while also aiming to continue growing your property's value for long-term success.

Understanding What Is Reasonable and Staying In Those Guidelines

While there are undoubtedly exceptional properties that yield huge returns, the typical return on investment of a rental property that is profitable long-term is 8% to 12%. This margin is a comfortable place to generate sustainable returns while also reinvesting to ensure that these gains continue over time.

If any of your rental properties deliver ROIs lower than these percentages, it’s time to look at your expenses: are there areas where you could cut costs? Sometimes, initial start-up expenses for a real estate investor’s first or second property can drive down profit margins. However, by reviewing expenses and adjusting the monthly rent amount based on market research, you can improve the ROI for an underperforming property. 

However, suppose your current property has a much higher ROI than the 8-12% we mentioned. Congratulations! That being said, consider whether you're cutting any corners to achieve these high returns. There is a possibility that you could be reinvesting into your property more, either through some much-needed updates that can help you retain renters or adding services or amenities that your property lacks compared to other similar rental properties in the Seattle area. 

Understand Cash Flow Versus Overall ROI

While a property owner must keep up with ROI numbers for an investment property, they also need a sustainable cash flow to see long-term profits. Many property managers will tell you that it’s great to have a high-value property, but if you cannot make the mortgage payments because of a lack of cash flow, your property will quickly lose money. 

Maintaining consistent cash flow is a long-term profitability strategy. Property owners need cash on hand when expenses arise to pay them promptly. They also need to set cash aside in reserves for those unexpected maintenance problems that come up or for planned repairs and upgrades. Having a healthy cash flow means you don’t have to dip into your savings or run up a credit card bill to take care of a rental property. 

Recognize That Some Profit is Tied Up in Equity

If you feel like your early efforts at operating rental properties are barely breaking even, remember to factor in the property itself. If you've got a mortgage payment, a big part of your rental income is going directly to pay that bill. Early on, a lot of your mortgage is just interest payments, meaning that your rental property's equity isn't going up very quickly. However, the longer you have the property, the more that equity factors into your long-term ROI. 

Years can also pass with properties appreciating in the housing market, meaning that you have some unrealized increase in value that you can use if you end up selling the property at some point. A property management company can tell you that renting out Seattle real estate is a long-term plan, so be sure to frame your goals through that lens. 

You Know The Value of Buying In Cash

If the idea of paying a mortgage for a rental property isn’t part of your financial plans, some investors wait to invest until they have the cash saved for a property purchase. 

If you have the assets, your strongest ROI is often possible if you have the leverage to buy a rental property in cash. This is especially true if interest rates on mortgages are on the rise since every additional dollar paid in mortgage interest is an expense, while paying cash for properties lets you cut that expense from your ROI calculations. 

You Use Inspections to Mitigate Repair Needs and Risk

If you see your property as static, you can miss out on valuable opportunities for better ROIs, including the value of a long-term strategy for keeping your property in great shape. Appreciation is harder to achieve if you aren't keeping the property in excellent condition. 

A good method to ensure your property is retaining value is to conduct mid-lease inspections to make sure that your renters are treating the property with respect and letting you know about any maintenance needs. This will save you money, making it easier to address maintenance issues (or potential problems) before they become significant (and costly) issues. Routine inspections also help you initiate a conversation if a renter's neglectful behavior is causing damage to the property.

So, now that you know a bit more about some best practices to improve ROI and property values, what are some aspects of operating rental properties that can hurt your returns or misrepresent accurate numbers? Being aware of these things can help you apply strategies to avoid income loss. 

Unfavorable Mortgage Terms

If you have a mortgage loan whose terms are wildly out of line with what you should be paying for the property, it may make sense to refinance or, if you've gained more assets, pay off the mortgage entirely. 

Keeping the costs of the mortgage loan down is a clear way to reduce your expenses as a rental property owner. While it's possible to leverage rental properties with mortgage loans effectively, you are using part of your 'profits' to pay that interest, and you have to factor that in. 

Forgetting To Include Key Expenses

If you are looking purely at the mortgage payment cost and the potential rental income while considering a property, you may be giving yourself an artificially inflated ROI. Everything from maintenance expenses to the time needed to review tenant applications for the property to the payment to clean the building before renters move in should be featured in your expense calculations. 

As you get started, you might not be sure what these expenses will be, and they do vary a lot depending on the property and location. However, keeping meticulous notes and working with a property manager can help you accurately estimate costs and manage budgets and income to improve ROI. 

Poor Upkeep Resulting in Low Valuation

If you assume your building will grow in value but habitually invest as little as possible between renters to keep the rental unit in good condition, you may be in for a surprise when you go to assess the current value of the property. 

What's more is that a poorly maintained building will, over time, grow less attractive to renters, resulting in either a falling rental rate or high vacancy rates (or both). In general, if you don't keep your rental property well maintained, the expenses just keep growing—and eventually, you're losing money. 

Ignoring Potential Appreciation As a Real Property Owner

That being said, if you have strong evidence that the value of other properties in the same condition as yours are appreciating in value in that neighborhood, it’s wise to factor in potential appreciation in your evaluation of your rental unit’s profitability. 

Rental property owners who have multiple properties sometimes realize those gains by selling off a property whose value has skyrocketed, then using some of the equity-turned-to-cash to help them place cash offers on other properties that, in turn, grow in value over time. In this way, appreciation can greatly contribute to your long-term ROI. 

Letting Disorganization Lead to Vacancy or Poor Pricing Choices

An often overlooked issue when a property owner counts on 12 months of rental payments is the possibility of losing a month or two to a vacancy in a rental. All rental properties experience some vacancy, depending on how quickly you find new renters after current tenants move out. 

However, property management companies can tell you that lengthy or extensive vacancy issues are often due to disorganization that leads to missed renewal opportunities and weeks (or months) without a tenant paying the rent. 

Property owners can reduce the potential for significant income loss due to vacancy by having enough resources and the right strategies to reduce downtime between renters. A Seattle property management company can help you improve tenant renewals by starting earlier, reducing downtime by advertising the property appropriately, screening rental applicants, and placing high-quality renters.