Renting out your property allows you to generate additional income and improve your earnings for the long term. However, all rentals may not offer an equal return on investment (ROI), which usually depends on different circumstances.
According to SLC Handyman Service, return on investment ROI rates depend on significant factors like the property’s location and the property’s condition at renting. Other factors can include occupancy levels, rental income, operating expenses, mortgage rates, property taxes, and the type of property purchased for rent.
Key points of ROI
- Return on investment or ROI calculates the rental property’s profitability in %.
- Homeowners measure ROI after dividing the annual return on investment by the actual investment cost.
- Two same rental properties can have different ROIs, regardless of how much you invest in them.
- Real estate investors also use different methods like cash flow, gross rent multiplier (GRM), cash-on-cash return, cap rate, and net operating income (NOI) to calculate ROI on a rental property.
What is Return on Investment (ROI)?
Return on investment is a technique to measure the profitability of a rental property for a certain period, and you will usually see it as %. Real estate investors use this method to examine the performance of a rental property. It is done by measuring the expected and actual profit generated by the rental property to the cash investment made.
What is the Best Rental Property ROI?
Major real estate firms consider a good ROI value to be between 8-10%. Properties with good ROI will always generate a profit. Investors usually avoid properties with 2-5% ROI. Here are some factors that will help you increase or decrease the return on investment for a rental property.
- The property’s purchase price and its initial repair cost (if any).
- Occupancy rate and rental income of the property.
- Property management charges, maintenance, homeowner association HOA dues, and other operating expenses.
- Annual expenses like property taxes and insurance premiums.
- Monthly loan payments such as principal, interest, mortgage down payment, and loan closing costs.
The basic laws of supply and demand and the type of rental property significantly impact the return on investment. Professional real estate investors know that the return on investment of a rental property may differ in different neighborhoods and markets, even if they are in the same city.
Higher ROI offers more potential profit for properties while including potential risks. Although, the location of a rental property affects the rate of ROI. Also, multi-family real estate usually has a higher ROI than single-family real estate. An area without proper security can negatively impact the ROI of real estate since it is cheaper and not good enough for investment.
Features that affect the ROI
Focus on the following features for a good ROI in real estate.
If you want to buy a property to rent, you will determine the types of residents you attract and the neighborhood. Even if they’re not fancy, houses in more expensive areas will always net more rent than homes in cheaper locations.
Before investing in a property for a better ROI, remember that the taxes may vary in different areas. You can get details on property taxes from the municipality office in your town or talk to the property owners or real estate investors in that area.
Areas with lots of offices around may attract more working residents. You can get information about these locations from a local library or town office. When big companies move to a new city, you can offer them real estate for rental purposes. Workers need to live close to their office location. That will be your best chance to invest in properties with good ROI.
Development in Areas
The areas with a lot of construction will be a good place for you to invest in for rental purposes. Look around and find areas where you can invest and grow your income.
Invest in Locations Near Schools and Universities
Make sure the location you’re investing in has schools and colleges around. Families prefer living in neighborhoods close to schools since it’s more convenient for their kids. If it is close to a university, you can expect students to be your residents, but be ready for summer as they usually leave to see their families.
Commercial areas have always been in high demand since they’re also expensive. If you meet the budget criteria for commercial real estate, investing there can offer a very high ROI.
Good cities and neighborhoods are essential when determining a property’s ROI when selling or renting. Focus on what we discussed above to find the ideal property worth renting.