Rental Property Return on Investment Tips

Rental properties have become a popular investment when it comes to real estate because they allow you to diversify your investment portfolio and create a passive income. Part of why it is such a popular method of investing is because savings accounts often do not give much of a return, and people have grown weary of the stock market after years of low interest.

Return on Investment (ROI) is the profits that your investment property is bringing in. This is an important part of investing because it shows you how lucrative a specific property or other investment is. ROI is one of the main indicators as to whether or not a deal is viable.

Plan to Hold the Property for the Long-Term

When it comes to rental properties, there are two ways that investors can earn their ROI — profit and appreciation. "In some areas, investors may want a higher cash flow in order to compensate them for slower appreciation. But if investors expect an area to appreciate substantially, they may be willing to forgo some of the cash flow in order to enjoy that appreciation."

You should be planning for the long-term when it comes to investing in real estate. So even if you are not necessarily bringing in much profit now, if you can hang onto that property long enough, you can build up substantial equity to retire on.

Location

One of the most important things about getting a good ROI is, of course, the location of the property. There are many cities that have major differences in their rent that are in close proximity to each other, and even different neighborhoods can have vast differences in price. While the property itself does factor into the rent rate of the property, what is even more important is the physical location.

Rent

The rent is a tricky thing to determine; if it is too high, you can end up with a property that sits vacant for months, but if you make it too low, it will eat into your profits. When you are trying to determine the rent, find out what the average rent is for the area, and then consider if your property is worth more or less than that and why.

Calculate what the property is going to cost you. "Subtract your expected monthly mortgage payment, property taxes divided by 12 months, insurance costs divided by 12, and a generous allowance for maintenance and repairs." Try to overestimate the amount you will need for maintenance.

Property Management

Managing rental properties can be a full-time job if you have multiple properties or one large multifamily complex; there is much more to it than you may think there is. "You have to fill vacancies, screen tenants, execute leases, show the property, collect rent, and communicate with tenants and vendors."

You can either hire a management company or manage the property yourself but managing it yourself can be difficult. While paying a management company will dip into your profits, it saves you time and a potential headache.

References

Beattie, Andrew. “Top 10 Features of a Profitable Rental Property.” Investopedia, Investopedia, 13 Apr. 2020, www.investopedia.com/articles/mortgages-real-estate/08/buy-rental-property.asp.

Brumer-Smith, Liz. “6 Tips for Rental Property Investing.” Millionacres, Millionacres, 9 Feb. 2020, www.fool.com/millionacres/real-estate-investing/rental-properties/6-tips-rental-property-investing/.

Royal, James. “10 Tips For Buying Rental Property.” Bankrate, Bankrate.com, 9 Sept. 2019, www.bankrate.com/investing/buying-income-property/.