When you are investing in real estate, it is important to know what a good return on investment looks like. This way, you can make a wise decision about what property to purchase.
In this article, we will discuss what is a good return on investment for rental property and how to calculate it. We will also offer some tips on how to improve your returns from owning rentals. So, whether you are a new investor or are planning to diversify your portfolio, read on!
Why Is It Essential to Determine the ROI on a Rental Property
The return on investment (ROI) is an important metric that measures the profitability of an investment. In other words, it tells you how much money you can expect to make from an investment over a period of time.
Determining the ROI of a certain property will also help make financial planning easier. For instance, if you know that a property will generate $500 in monthly cash flow, then you can budget accordingly for your mortgage payments and other expenses.
There are two main types of ROI: internal and external. Internal ROI is what matters most to investors because it is a measure of the actual cash flow that an investment generates. External ROI, on the other hand, factors in things like appreciation and tax benefits. By knowing both types of ROI, you can get a more accurate picture of what to expect from an investment.
Moreover, knowing the return on investment rental properties generate will make it easier for you to compare them and make a decision about which one is the better investment.
The Average ROI for Rental Properties in the US
The average ROI on rental property is 8-12% according to TheShortTermShop.com. This number will differ depending on the location and the type of rental property you own. For example, a luxury condo in New York City will generate a higher ROI than a single-family home in rural Ohio.
Apart from the location and the type of property, there are also other factors that affect a rental’s ROI, such as the condition of the property, the rent charged to tenants, and the operating expenses associated with ownership and maintenance.
To get an idea of what kind of ROI you can expect from your rental property, it is helpful to look at data from other investors in your area. This data will give you an idea of what is average or above average for ROI in your market. You can find this data by searching online or contacting a local real estate agent. Once you have this information, you can use it to compare different properties and pick one that truly gives you the best returns.
Now, what’s a good ROI on rental property?
This actually depends on what your investment goals are. For example, if you want to generate a passive income that can cover your mortgage payments, then an ROI of around 12% would be considered good. On the other hand, if you are looking for more aggressive growth and are willing to take on more risk, then you might be happy with an ROI of 20% or higher.
It is important to note that there is no right or wrong answer when it comes to what is a good ROI for rental property. It all depends on what you are hoping to achieve with your investment.
Which Types of Rental Properties Generate the Best ROI
As mentioned earlier, the location, type of property, and other factors all play a role in determining the ROI of a rental. With that said, there are certain types of properties that tend to generate higher returns than others.
For instance, multi-family properties, such as apartments and duplexes, usually have a higher ROI than single-family homes. This is because they offer more units which means more rent potential and economies of scale when it comes to things like maintenance and marketing.
Another type of property that tends to generate high returns is a short-term vacation rental. These rentals are in high demand and can command premium prices, which means they have the potential to generate a very high ROI.
Finally, we have student housing. There is always a demand for affordable housing near colleges and universities. If you can find a well-located student rental, you can expect to generate a healthy return on your investment.
How to Calculate the ROI of a Rental Property
Now that you have an idea of what is a good return on investment for rental property, let’s discuss how to actually calculate it.
The most common way to calculate ROI is through the following formula: ROI = (Net Profit / Cost of Investment) x 100.
To use this formula, you will need to know three things: your annual rental income, your annual operating expenses, and the total cost of your investment.
Your annual rental income is simply the amount of rent you collect from tenants each year. To calculate your annual operating expenses, add up all of the costs associated with owning and maintaining the property, such as mortgage payments, insurance, taxes, repairs, and so on. The total cost of your investment is how much you paid for the property, plus any renovations or improvements you made. Once you have all of these pieces of information, plug them into the formula to calculate your ROI.
For example, let’s say you paid $200,000 for a rental property and spent an additional $20,000 on renovations. The property generates $30,000 in annual rental income and has annual operating expenses of $12,000.
Net Profit: 30,000 – 12,000 = 18,000
Cost of Investment: 200,000 + 20,000 = 220,000
Using the formula above, we would calculate the ROI as follows:
ROI = (18,000 / 200,000) x 100 = 8.18%
Now, based on the information we discussed earlier, this is considerably a good rate of return on rental property investments, as it is within the average range.
Effective Strategies to Improve Rental Property ROI
It would be great to get the average return on real estate rentals, but what if you find that the ROI of your rental property is lower than what is average for your market, don’t worry. There are still steps that you can take to improve it.
1. Lower Your Expenses
One of the best ways to improve your rental property ROI is to lower your expenses. Remember, your operating expenses eat into your profits, so the less you have to spend on things, like repairs, insurance, and taxes, the higher your ROI will be.
There are a few different ways you can lower your expenses, such as shopping around for better deals on insurance or negotiating with vendors for lower prices. Another way to lower your expenses is to make energy-efficient improvements to the property, such as installing solar panels or energy-efficient appliances. Not only will this save you money each month on utilities, but it will also make the property more attractive to tenants, which could help you charge higher rents.
Be sure to keep a close eye on your expenses and always look for ways to cut costs. A little bit of effort in this area can go a long way toward boosting your rental property ROI.
2. Increase Your Rental Income
If you want to improve your rental property ROI, then you need to focus on increasing your rental income. The more money you can bring in each month, the higher your ROI will be.
There are also a few different ways you can increase your rental income. One way is to simply charge higher rents. If you find that your rents are below market rate, then raising them could help you boost profits and ROI.
Another way to increase rental income is to make improvements to the property that will make it more attractive to tenants, such as adding new amenities or making cosmetic upgrades. These improvements could help you charge premium prices for rent.
You can also increase your rental income by renting out additional space on the property, such as a garage or storage shed. If you have extra space on the property that you’re not using, then why not put it to work and earn some extra income?
3. Refinance the Property
If you’re struggling to improve your ROI, then refinancing your rental property could be a good option. Refinancing can help you lower your monthly mortgage payments, which will free up some extra cash that you can use to make improvements to the property or cover other expenses.
Refinancing can also help you access equity that you can use to make renovations or repairs that will increase the value of the property and make it more attractive to tenants. Just be sure to do your homework and shop around for the best refinancing deal before making any decisions.
4. Use a Good Marketing Strategy
If no one knows that your rental property is available, then it’s going to be very difficult to rent it out. That’s why you need to have a good marketing strategy in place to make sure that potential tenants are aware of the property and what it has to offer.
There are a few different ways you can market your rental property, such as listing it on popular rental websites or using social media. You can also put up signs around the neighborhood or distribute flyers in local businesses. Whatever marketing methods you use, just be sure to get the word out there about your rental property so you can start attracting tenants.
These four strategies will not only improve the rate of return rental property investments generate but will also result in a higher quality of life for you as the property owner. Just be sure to put in the work and stay patient—good things take time!
Real estate investing can be a great way to build wealth, but it’s important to be well-informed and understand what you’re getting into before making any decisions. By knowing what is a good return on investment for rental property and following the tips in this article, you can be well on your way to making wise choices and achieving success as a landlord.
For more interesting tips and information on real estate, feel free to check out the rest of our posts!