Some of the biggest questions that property investors ask when deciding on an investment property relate to ROI, or their return on investment. Your ROI is what you can expect to earn on a specific investment property. Understanding how to calculate the ROI on a rental property will help you determine if an investment is right for your situation and specific financial goals.
Let’s say you buy a home for £100,000.
You spend £10,000 on maintenance, repairs, and renovations.
Therefore a total of £110,000.
Every month, your tenant pays you £1,000 for the rent (or £12,000 a year.)
You also pay around £200 a month (or £2,400 a year) for utilities and taxes and insurance.
With all of the expenses and costs considered, your annual return on the property is £9600 (£12,000-£2,400)
To calculate the ROI, you take your annual return from the property (£9600) and divide by the total amount of money you invested in the property, (£110,000.) Your total, 0.087 (or 8.7%), is your ROI. Typically, and ROI between 7% and 10% is considered good. Of course, the higher the better. To achieve this, your property will need to be in good condition and be located in a highly desirable area.
When looking for an investment property that will generate the highest ROI, you should be looking for a few key indicators:
Location, location, location. It is no secret that location is one of the most important factors when buying and selling property. Properties located in safe and economically thriving areas have a better chance of producing higher-than-average ROIs.
As you research the potential of a specific investment property, you’ll want to consider the local market status. How does this particular investment property compare to other homes for sale in the area? Is the housing market healthy? What would happen if the economy took a turn for the worst? How would your investment hold up in this type of situation?
Condition Of The Home
The more repairs and renovations of property needs, the more money you’re going to have to put into it upfront. The more money you have to put into it upfront, the longer it will take to generate a return. While fix and flip properties can be extremely profitable, It could take you significantly longer to see a return On these types of properties versus homes that are turnkey and basically rent ready.
Low Vacancy Risk + High Income Potential
A property with a good ROI will have a low vacancy risk and a high-income potential. Properties that attract high-income tenants and are located in areas with high occupancy rates will generate a higher ROI then properties in lower-income neighborhoods. If you can find a property that brings in a significant amount of rent each month and attracts tenants that stay for the long-term, you will quickly see a return on your investment.
If you currently own an investment property and want to increase how much revenue it is bringing in regularly, there are a few things you can do to maximize your ROI:
- If your investment property is not currently occupied, get it rent- ready now. This means making all necessary repairs and for forming a deep clean so that you can quickly get your next tenant in and start making money.
- If there are tenants in your home, make sure to conduct regular inspections. If you are only inspecting your property when tenants move in or out, You could miss the opportunity to perform routine maintenance or fix small repairs before they turn into more significant issues, when you are regularly checking in on the condition of the home, you lower expenses and increase your ROI.
- Be very careful about the contractors and vendors you choose to service your home. If you are paying a lot for their services, this takes away from your return. Do your research, check reviews, and find contractors and maintenance service providers that offer fair rates and high-quality services. The more maintenance and repairs you can do on your own, the more you save
- If you are currently looking to fill a vacancy, don’t rush it. Take the time to carefully screen and run background checks on your tenants. It is in your best financial interest to make sure the tenants of your investment property will not only pay rent on time but take care of your property like it is their own. Finding good tenants means reducing turnover. Fewer voids mean you always have consistent passive income coming in from the property.
One of the biggest mistakes a property investor can make is not accurately calculating the ROI on a specific property. It can be easy to get caught up in the excitement of buying a particular property, focusing strictly on the aesthetics of the property or its potential. But when it comes down to it, the ROI should be one of your most significant deciding factors.
Is this property going to make you money? And if so, how long will it take? When you know the answers to these questions, you can walk into your investment property purchase with confidence.
Read more content from Nick Statman.