The Return on Investment of Rental Property: How to Calculate ROI

Investing in a Salt Lake City rental property is a smart way to grow your net worthbut how do you know if a specific property is the right investment for you? One of the most critical metrics that landlords should use when deciding whether or not to invest in property is return on investment, or ROI.

This metric helps investors understand how much money they’re generating from their investments and indicates whether investing in property is worthwhile. In this blog post, our Salt Lake City property management experts talk about what ROI means and how to calculate it!

Why Do Property Management Companies Say That ROI Matters?

Smart investors that spend wisely on new properties, ongoing maintenance, and the right upgrades must monitor ROI closely to thrive in the long run. If you’re spending surpassing the rental income you can generate from your properties, your returns suffer!

Property management experts know that ROI is one of the essential metrics for owners to consider when deciding whether or not to invest in rental property. ROI will give landlords an idea of how much money they are generating from their investments, which indicates whether it’s worthwhile to continue investing more resources into a property.

The higher your return on investment, the betterhowever, excessively high ROIs aren’t always an indicator of long-term success. If the rent amount is too high for the market or you’re not investing in preventive maintenance or timely upgrades to save money, you’ll eventually run out of tenants willing to overpay for a property that is out of date or poorly maintained.

In contrast, if your annual returns consistently hover around 0%, our Salt Lake City property management team encourages you to re-evaluate a property and what types of gains you need to keep it as a rental in your portfolio.

Roi return on investmentWhat Is the ROI Calculation for Rental Properties?

ROI is a profitability ratio that evaluates income vs. expenses. To calculate the profit on any investment property, owners must analyze all expenses against annual income.

In the simplest terms, a single-family home purchased for $100,000 with annual revenue of $10,000 and $3,600 in annual expenses generates an ROI of 6.4% when using this formula:

  • (income – expenses) / purchase costs
  • Purchase costs would include all start-up expenses, including closing costs and renovations

Is an ROI of 6.4% good? As property managers, we see that many investors have an ROI goal closer to 10% for a property. However, only you can judge if the returns you see are “good” or keeping you on track toward your long-term income goals.

What might be a preferable ROI for one property owner might be the same for you. Rather than compare returns to other investors, set your benchmarks and work with a property management company to maximize the ROI for every property in your real estate portfolio.

Is It Really That Simple?

It can be, but in many cases, property managers can tell you that finding the true ROI for an investment property in Salt Lake City requires careful accounting to track every dollar of income and expenses.

When analyzing ROI, it’s critical to plug in the net income (not gross income) to get an accurate profitability ratio. The return on your investment dollars must include expenses that keep the property operating in excellent condition, including any costs associated with managing tenants. Your operating expenses should consist of marketing costs, monthly property management fees, maintenance costs, and more. Depending on how you purchased the property (cash-only vs. financed), you’ll need to factor in interest and other expenses to the ROI formula.

A property manager knows that neglecting to include necessary expenses can inflate your numbers, giving you a false evaluation of the profitability. Most property management companies in Salt Lake City can tell you that reducing costs is one way to improve ROI, but leaving critical expenses out of your formula won’t help you make more money or increase returns!

How Can Investors Improve ROI?

After running the ROI formula, how do you feel about the number you see? If you’re not happy or it falls below expectations, don’t worry. ROI is not a permanent percentage! Look at the number you see as a starting point toward improving the returns from your rental property.

Take action to:

  • Reduce costs
  • Raise the rent (if justified)
  • Renew more tenants
  • Make smart property upgrades
  • Hire a property management company to apply expert strategies that boost returns

With best practices and expert insights, property managers know that ROIs can move in the right direction! Looking at ROI can also help investors avoid purchasing a Salt Lake City, UT property that will never pay off (despite your best efforts to make it work).

Work With a Salt Lake City Property Management Company to Analyze ROI

When evaluating the profitability of a possible investment or Salt Lake City rental property that’s already in your portfolio, make sure to account for all costs. If you’ve calculated ROI and it looks like your return is less than what you hoped, talk with one of our experts at Reeder Asset Management. We help landlords analyze their real estate investments and apply expert property management services and strategies to improve returns! If you’re ready to talk, reach out today.

Calculate your rental’s ROI the right way! Click to use our free Rental Property ROI Calculator.

Posted by:
Reeder Asset Management on September 2, 2021