Let’s get into the numbers. After all, to really know if the rental property investment journey is a good fit for you, you’ll want to be sure there’s a decent rate of return. So while many of the online “experts” are great about throwing out general equations to calculate your ROI, we thought it might be more useful to dive into the details behind the numbers. Having a thorough understanding of what and how you calculate each property you consider will ensure you continue to make the soundest financial decisions moving forward.
The ROI Basics to Know Before Investing
You might have a particular property in mind already. You’ve researched the area and like what you see so far. But before you buy, you’ll want to calculate your ROI potential. Start with these essential rental property details and create a list for yourself.
Property Statistics: Have the property value on-hand, along with the square footage and number of bedrooms.
Property Repair Costs: Based on what you see so far, you know there might be some renovations needed before the property is move-in ready. List those ballpark estimates here.
Mortgage Information: Understand the terms of a mortgage for this property, including loan terms, interest rates, down payments, and closing costs.
Rental Income Potential: Have an idea of what your monthly rental income might be. This is what you expect to charge for rent, minus monthly overhead expenses and anticipated vacancy rates.
Monthly Expenses: Think about monthly repairs, utilities, any HOA dues, or property management partnership costs.
Annual Expenses: Lastly, look at annual insurance costs and estimated property taxes might be.
Once you have all of these details in front of you and you’re still interested in moving forward with the investment, you can begin to crunch the numbers.
Components of the Most Realistic ROI Calculations
If rental property investing is new for you, there are a few industry-standard definitions with which you’ll definitely need to be familiar. And even the veteran property owners might appreciate some gentle reminders about these key factors.
Cap Rate: The capitalization rate will help you understand your rate of return as you compare rental property opportunities. Divide your net operating expense by the price of the rental purchase to find out your cap rates.
Net Operating Income (NOI:) The net operating income will tell you just how profitable your investment really is. You can subtract any operating expenses from your property’s gross income to calculate it.
Annual Gross Rent Multiplier: You might hear veteran investors talk about their GRMs. This helps you measure the value of the rental investment. Divide the total sales price by annual gross rent totals to help you determine if your asking price makes sense.
Cash-On-Cash Return: Take your after-tax annual cash flow and divide it by what you paid to purchase the property to determine the cash-on-cash return. Ultimately, this represents what you can expect in the way of a return based on your initial investment.
Annual Cash Flow: This might be a more obvious calculation but understanding your annual cash flow can be an important step often overlooked. Net operating expenses minus debts will produce this number for you.
Rental property calculators can be helpful with any of these determinations. But now, you’ll also have the notes to better predict ROI.
What Are the Rules for a Good ROI?
Every rental property investor’s situation is going to be different. However, in general, any ROI above ten percent is considered fairly decent. And in many circles, there’s nothing wrong with falling into that five to ten percent range, either. It boils down to how you can comfortably manage your risks and what your budget will allow.
When you’re ready to calculate your ROI and explore your options, let PMI JCM Realty Group help!
We continue to explore the rental property investment trends in the Tampa area market. If this ROI-centered topic sparks interest to learn more, sign up right now for our free webinar. There are additional strategies in our How to Streamline Your Rental Portfolio for Maximum Growth conversation! It’s another hot topic for every rental property investor to discuss.
You can also find ongoing answers to your most pressing rental property questions by joining our Facebook group to connect with other property owners interested in achieving similar ROI goals. Exchange fresh management ideas and discover shared process challenges with other rental property investing professionals. And should you have unique or specific questions that require a more in-depth, tailored solution, schedule a meeting on my calendar; let’s discuss!