If you own Salt Lake City, UT, property, you might be interested in finding out more about your ROI. While many investors enjoy the business, they're not in "just" for fun! Property owners invest to generate a profit and build long-term wealth. Property managers will tell you that understanding the ROI (and staying on top of it) is vital for success.
When evaluating a potential property, investors need to know that it will yield a good ROI. As time goes on, routinely evaluating current returns helps you stay on track toward your goals and know when (or if) it's smart to keep putting money into a property. Today our Salt Lake City property management experts provide a breakdown of understanding ROI when you finance a rental property.
Differences Between Cash and Financed Rental Purchases
When you finance your rental property—which many investors do—the ROI calculation is a bit different. It's not as straightforward as a cash transaction. With a cash transaction, you know exactly how much you put into the property from the start, so you only need to deduct the expenses to get to the net profit number. Once you divide that by the initial amount invested, you'll have your cash ROI. However, there are more factors involved with a financed transaction because of your monthly mortgage payment.
How to Calculate the ROI on Financed Transactions
The best way for property managers to understand the return on investment for financed rental properties is to look at an example. Let's assume you bought a rental property for $150,000, and you took out a mortgage on it, meaning you will have ongoing financing charges.
Your upfront costs would include the down payment and any remodeling or upgrade costs. For example, if you make a downpayment of 20%, you would need $30,000 ($150,000 x 20%) to put down on this property.
Much like calculating ROI for a cash transaction, you'll need to include costs for renovations to get the property rental-ready. These costs will vary, depending on the condition of the home. For the sake of this example, we'll say you paid $8,000 for remodeling. This means that your total upfront, out-of-pocket expenses were $38,000 ($30,000 + $8,000).
How Is It Different Than a Cash Transaction?
If this was a cash transaction, we could stop here and start calculating the ROI—but we have to remember the ongoing financing costs of a mortgage.
- If you took out a 30-year loan on a $120,000 mortgage with a fixed interest rate of 3%, the monthly principal and interest payment would be $505.
- Now, we have to look at the regular monthly costs like taxes, insurance, and any utilities you choose to cover. We'll say these add up to $200 per month, making the total monthly payment $705.
- Income comes next in the calculation formula. If you generate $1,500 per month, your annual income is $18,000. We'll need to subtract the expenses to find the monthly net income ($1,500 – $705 = $795). So, the monthly cash flow is $795.
Next, we look at these numbers annually to determine the ROI. The net annual earnings would be $9,540 ($795 x 12). To calculate your total ROI on the property, you need to divide this amount by how much you paid upfront for expenses (down payment and upgrades). The calculation would look like this:
ROI: $9,528 ÷ $38,000 = 0.25.
Since ROI is always expressed as a percentage, we need to multiply 0.25 by 100, which gives you an ROI of 25%.
Adding Home Equity Into the Equation
Rental property owners may also want to factor in the home equity when looking at the ROI. Why is this important? The best property management companies will tell you that the equity is not cash you have right now, but it is future money you can expect to gain. Since you know the property will be worth something in the future, you can add that into the equation by understanding and incorporating amortization.
How Can Property Owners Improve ROI?
After you run the numbers, make sure the ROI you see is in line with your long-term goals. If the number seems low, work with a property manager to apply strategies to improve returns, like better resident retention, smart property upgrades, and adjusting the rental rate! Sometimes small changes can make a big difference in your monthly returns and long-term revenue.
Boost ROI With A Salt Lake City Property Management Company
Real estate investors can stay on top of their income and profits when they connect with one of the top residential property management companies in Salt Lake City. A property manager can assist you with ROI, setting rental rates, dealing with maintenance, and more. Reeder Asset Management is here to help analyze investment properties and boost your returns. Reach out when you're ready to talk about the numbers and how property management services improve ROI!
Learn about your property's current ROI! Click for our free Rental Property ROI Calculator.