Calculating Return on Investment for Rental Properties in Cache Valley

Why Is ROI Important?

You’ve probably seen “ROI” referenced for a variety of investment types, including bonds, stocks, or a savings account—and it applies to real estate, too. ROI is important because it helps real estate investors determine if they are earning a sufficient return on their investment. This metric can be used for rentals already in your real estate investment portfolio and making decisions on a potential investment to get the best results from your rentals.

Remember this property management tip: While return on investment is a profitability ratio, it’s not the same as “profit.” You might have good cash flow at the end of every month after collecting the rent and paying bills, but that doesn’t necessarily mean your rental is “profitable.” ROI calculates the ratio of costs vs. income to analyze the success (or profitability) of a rental.

ROI calculations also allow you to compare how much money you make against what was initially invested to see if the home is worth buying—or if you need to apply different strategies to improve returns on a rental you already own and operate. If the return on investment calculations don’t demonstrate the potential income you need, a property management company advises investors to walk away from a bad property before making a bad investment!

ROI Calculations Must Be Accurate

When gathering data and running ROI formulas, property management companies recommend making sure your information is accurate (and complete). Understanding meaningful returns can be challenging when numbers (costs or income) aren’t accurate or specific expenses are left out. If critical rental property expenses don’t make it into your formula, you could see a positive ROI for a bad investment and make a terrible mistake buying a property that never pays off.

For a rental property you already own, using inaccurate numbers can give you a false sense of profitability when a rental is actually suffering losses.

For Cash-Purchased Properties

While the basic ROI formula is the same for cash-purchased properties and financed investments, it’s easier to calculate returns for a property that doesn’t require financing (or monthly mortgage payments).

To calculate ROI on a property purchased with cash, you will need to know the following information about your investment:

• The original purchase price of the property (including all closing costs)
• The monthly rent amount (and the total income generated annually)
• Monthly operating costs (insurance, property tax, maintenance, fees for property management services, etc.) and the total annual expenditures

Finding the ROI with this information is fairly straightforward. Take the net annual returns (after subtracting monthly costs from rental income) and divide that number by the original investment amount (or the cash price paid for the property). Then, convert the number into a percentage to view the ROI as a percentage.

For a Financed Rental Property

When financing a rental, property management experts can help you factor in a few additional costs. Start with the number we mentioned above, then add the down payment amount and your monthly mortgage payment (principal and interest). Your “net” returns must factor in these additional costs to arrive at an accurate percentage.

If you make any renovations (for either a cash purchase or a financed investment), make sure to include those costs in your original investment expenses.

Monitor ROI Regularly

Property managers can tell you that ROIs will change over time, depending on monthly and annual costs, changes to the rent amount, and other factors. Make sure you don’t rely on an ROI number that seems good today but could deteriorate over time without excellent property management strategies in place to maintain good returns.

Use ROI calculations to check progress and profitability for rentals every year. If you have a low ROI that needs to improve, a property manager can help you set a benchmark and run the calculations again after another year of optimized strategies and updated expenses and income from the year.

If you’re not sure about every cost to include in your formulas or how to improve an ROI that’s too low, work with a Cache Valley property management team to analyze and boost returns!

A Cache Valley Property Management Company Improves ROIs!

Calculating the returns for a rental can be tricky, but it’s worth doing to get an accurate picture of your financial situation. When calculating ROI to analyze profitability for rental properties, work with a property management team to make sure you use accurate numbers and understand the differences in calculating returns for a cash purchase versus a financed investment. If you want help with this process, Reeder Asset Management is here to assist landlords in analyzing their expenses and improving their ROIs! Reach out today if you need assistance with any part of managing your rentals—we’re happy to help through our full-service property management!

Learn more about the formulas for ROI! Get our free Rental Property ROI Calculator.