The bottom line for any rental property investor is to know their return on investment (ROI). If you're not generating enough income from a property, then it's not going to be a good investment for you, or, at the very least, it may require some adjustments—like raising the rent. A capable property manager can evaluate your rental properties and let you know if your ROI is profitable and whether your rental rates are set right.
Since you paid cash for your investments, you might think it's easier to generate a positive cash flow. While it might be easier to calculate ROI for cash purchases, it's not always easier to optimize cash flow compared to a financed property. Let's check out what our Cache Valley, Utah property management advisors have to say on understanding return on investment for a cash-purchased investment property.
How Do You Calculate the ROI on Rental Property?
When you dive into calculating your rental property's ROI, it's not as complicated if you paid cash for it. You don't have to factor in the mortgage payment and amortized interest rates. Of course, there may be some factors down the road that could change the ROI, but, for the most part, it's pretty straightforward. To arrive at the ROI, property owners divide the net profit by the cost of the property. To determine your net profit, you'll first need to subtract expenses from the income you generated.
Here's a residential property management example of how you would calculate ROI on a rental property you purchased with cash:
- Let's say you purchased a home for $200,000 and paid cash. You add a total of $10,000 of investment through upgrades and renovations before it's ready to rent out. Your total investment now is $210,000.
- You charge $1,800 every month in rent, totaling an annual sum of $21,600 for your rental income.
- Now, let's calculate the expenses for the property every month. The property taxes, insurance, and trash collection are $225 a month, which comes to $2,700 for the year.
Your net annual profit is $18,900 ($21,600 minus $2,700). To figure the ROI, a property owner must divide the net annual profit by how much they invested (total cost of investment), which was $210,000.
For this property, the ROI = $18,900 ÷ $210,000 = 0.09. Since ROI is always reflected as a percentage, you multiply your answer by 100, and that is the ROI (0.09 x 100 = 9%). Your ROI on this cash-purchased rental property is 9%.
What is a Good ROI?
Now that you have this number, you might be wondering what to do with it. In Cache County, Utah, is it a good number, a bad number, or somewhere in the middle? You may have your own goals about what you want for your rental home ROI. However, if you're working with property management professionals, they can advise you about the best strategies to ensure you are investing your money wisely. For the most part, experts suggest aiming for between 10-15 % ROI. This ensures that you are making a healthy investment that allows you to meet your long-term goals or have extra funds for other potential rental properties to add to your portfolio.
With our property management example above, the ROI was 9%, which is close to the 10% goal. In a case like that, you could always eliminate the trash collection fee by having the tenants pay for it, reduce costs in other areas, or raise the rent by a reasonable amount. A Cache Valley, Utah property management advisor can help you manage the budget, review rental market analysis to optimize the rental rate, or both!
Other Factors That May Affect ROI
Your ROI may be impacted along the way by factors that are not as straightforward as the above calculation. Something may go wrong in the rental property that you weren't expecting. Even if you remodel or upgrade the property before the tenants move in, things sometimes break down or need minor repairs. This can cause your ROI to fluctuate a bit as you incorporate unexpected expenses into your calculation.
Another factor that may put hamper your income flow is a vacancy. Property managers know that if a tenant moves out and the rental unit is vacant for two or three months, that will influence the ROI due to a lack of rental income during those months. If you work with one of the best Cache Valley, Utah property management companies managing your properties, you'll enjoy lower vacancy rates, reduced operating costs, and more income to boost returns! The right property management professionals ensure that your rentals stay full.
Let a Cache Valley Property Management Company Manage Your Rentals
Balancing the issues around ROI can be complicated and overwhelming, especially if numbers aren't your "thing." It's helpful to have a property manager by your side who can give you insight into what properties will yield the best ROI. A Cache Valley, Utah property management company can also do a rental rate analysis to ensure your properties bring in the right amount of income every month.
If you're ready to optimize your returns, give us a call! Reeder Asset Management is here to help you understand the numbers and make sure you meet your goals.
Get ready to make the most of your investments by taking advantage of our free ROI Calculator!