The return you earn on your investment property (ROI) shows you how much money you’re making. Usually, you’ll find it expressed as a percentage or a ratio, and while it seems like it should be a matter of simple math to calculate your ROI, there are several variables that can make analyzing your returns and profits a bit complicated.
In the most basic terms, you can calculate your ROI by dividing the dollar amount of what you earn by the total dollar amount of what you paid out of pocket for the property. It might look like this:
Earnings / Cost = ROI
The length of your mortgage loan will impact your ROI, as will your cash purchase. Today, we’re providing a high level overview of calculating your ROI, and we’re also sharing a couple of our best ideas for maximizing what you earn.
Evaluate ROI on Rental Homes
The amount of ROI you’re able to earn will depend largely on the market strength, because your earnings will depend on how much rent you can charge and how long your vacancy will be.
In the Oakland market and surrounding areas, your ROI will be impacted by location and whether you paid cash or have a mortgage. The amount of interest you pay has to be included in your equation as an expense.
Every investor is as unique as each rental property. Your scale of success will depend on your investment goals, the money you put down, and the way you’re leveraging your investments. Any time your real estate investment is making money and not losing money, you can feel pretty good about renting out a home that is earning cash flow and growing in value.
How to Crunch the ROI Numbers
Your first step in determining your ROI is to look at your annual rental income. Perhaps you’re renting out a property for $2,000 per month or $24,000 annually. That’s your income.
Then, you have to subtract all the expenditures associated with your rental property. This would include your fixed expenses like mortgage payments, taxes, insurance, and any HOA or condo fees. Then, there are other variable costs to consider like maintenance and vacancy. The number that remains gives you a general idea of what you’re earning in cash flow. That’s going to contribute to your ROI but remember what really matters is that you’re gaining equity from year to year and at the same time, your asset is appreciating in value.
Increasing ROI for Better Investment Income
You’re going to focus on increasing your ROI when you rent out a property. That means avoiding vacancy and turnover costs whenever possible. When your property is unoccupied, you aren’t earning any rent and you’re also spending money to keep the home clean and maintained. You’re the one paying to keep the lights on. These things hurt your ROI, so a good way to maximize what you earn is to keep your property occupied.
Also important is preventative maintenance. If you want to save money on repairs and increase your ROI, make sure you are paying attention to the way your property functions and to its current and potential needs. Preventative maintenance saves you money and eliminates a lot of headaches.
Remodeling your home won’t necessarily earn you more in the short term; it will take a while to earn back the money you invest in a brand new kitchen or an extra bedroom. But, making small and inexpensive changes will have an immediate impact, and it won’t cost you a lot. A fresh coat of paint, for example, will make your home look and smell new and modern. Update the lighting and the flooring. Even buying and installing new drawer pulls or cabinet knobs will have an impact on how tenants see your home.
Finally, working with a professional Oakland property management company can positively affect your ROI. Property managers know how to help you earn more and spend less. We’d be happy to talk more about your investment plans and potential. Contact us at Prime Property Group.