What is a Good ROI for Rental Property? How to Calculate It

Real estate investment is considered one of the most secure methods of wealth creation, but it is essential to understand that mere ownership of the property is not enough for profits. We have noticed that new real estate investors are often concerned about the purchase price of the property and the potential for appreciation, but they are often neglecting the current performance of the investment. In order to understand the performance of the investment, it is essential to calculate the Return on Investment (ROI).

The best property management in Moore, OK, professionals often highlight ROI, simply put, as a measure of the rate of return on investment compared to cost. As far as rental property owners are concerned, it is the ultimate yardstick of performance. It helps us assess whether we are getting the best out of our property, whether it needs to be made more efficient, or whether it is time to sell it. As property managers at First Class Property Solutions, we use these figures to help our clients generate profits instead of merely accumulating expenses.

Comprehending Core ROI Metrics

To understand the whole story of how a company has performed, you have to go beyond a single number. There are a number of different measures that help us understand profitability in different ways.

The Capitalization Rate, also known as Cap Rate, is a key calculation that measures the return on investment for real estate investment properties based on the income that the property is expected to produce. It solely depends on the property without considering the cost of finance or any mortgage. This helps us compare the profitability of similar properties.

The most urgent problem of the landlord may well be the Cash Flow. This refers to the net amount of money flowing into or out of a business or financial product. For a rental property, this refers to the money left after all expenses, including the mortgage payments, are settled. This means having money flowing into your pocket on a monthly basis.

The Cash on Cash Return is very important to those investors who have financing. This is because it calculates the returns on the amount of money that is invested in terms of cash. Unlike the Cap Rate, it takes into consideration the mortgage payment and calculates the returns on the amount of money actually invested as the down payment.

Total Return considers the larger picture. This approach takes into account not only your annual cash flow but also your equity growth through your mortgage payoff and property appreciation. This measure of return gives you a long-term perspective of how your investment has helped to build your net worth.

Step-by-Step Guide to Calculating ROI

The formula for ROI is simple, but the challenge for many investors is to get the figures right. To calculate the ROI, you will need to take the annual return value of the investment and then subtract the total cost of the investment. You will then divide the result by the total cost of the investment. Finally, you will multiply the result by 100 to get a percentage.

For instance, if you purchased the property for cash, and it made you a net profit of $6,000 per year while the total cost was $100,000, then your ROI would be 6%. However, if you purchased the property through financing, then you would calculate the ROI based on the cash you paid as the down payment and closing costs as against the cash flow you generate every year.

Average rate of return on rental property is a common benchmark investors use when evaluating new opportunities, along with answering frequently asked questions such as, what is a good return on rental property? Understanding this helps put your own numbers in perspective.

Factors Affecting ROI

Calculating the number is the simple part; it is an exercise in math. What drives the ROI, however, is where the expertise lies. The most important factor in ROI is clearly location, since it determines not only the rents you will be able to charge, but the type of tenant you will attract.

Maintenance expenses also form a huge factor. An older property might have a low purchase price and thus appear lucrative in terms of its Return on Investment. However, maintenance expenses could ruin your profits. Property taxes and premiums of insurance form other expenses which change from region to region.

Keep in mind that the average ROI on rental property will vary depending on these factors, and investors are wise to recognize what constitutes a good ROI for rental property in their specific market.

ROI as an Investment Tool

But knowing your ROI is more than just something you can brag about; it’s also a diagnostic test. If your ROI comes back low, perhaps it’s time to increase rent, reduce operating costs, or upgrade your property to appeal to a more profitable tenant base. At First Class Property Solutions, we believe that in order for real estate investment to truly be profitable, you have to constantly monitor and adjust these factors.