Owning investment property comes with many ups, downs, and decisions to make. Any time an investor decides to purchase a new property in the Dallas-Forth Worth area, you want to ensure it generates the best return on investment.
However, there's more that goes into determining your ROI than how much cash you'll get monthly or annually for it. Several factors play a role and defining your long-term and short-term goals is crucial when looking at your ROI. Our DFW property management advisors can help you get the most of your investment properties. Check out these tips to define your real estate investment goals and generate the ROI to get there!
What Is ROI for Rental Properties?
Knowing what ROI means and how it relates to rental properties is the first step in buying and managing successful investments. In the most basic sense, we know that ROI (or return on investment) means calculating the total net profit you receive from a property and dividing it by the total cost. ROI is a profitability ratio that analyzes income vs. expenses.
Let's say you buy a house and sell it immediately without putting anything into it (for the sake of any easy example). You purchase the house for $200,000 and sell it for $250,000, so your net profit is $50,000. That means your ROI is 25%.
When it comes to rental properties, there are more variables involved because you have rent coming in and monthly expenses going out. Therefore, the net profit calculation is more involved. Whether you paid cash or financed the property will make a difference in your ROI. Determining if your ROI is on target also depends on whether you want to prioritize cash flow or appreciation. That's why property managers recommend that It's best to define your investment goals first so that you can make better decisions.
What Are Your Investment Goals?
Your investment goals will directly impact how you view the success of a real estate investment. Property owners must determine if an investment is for cash flow purposes or appreciation. Since it's hard to meet both goals with the same property, defining your priorities and evaluating ROI accordingly is important.
Of course, all investors want the best of both worlds—but realistically, it's challenging to have an incredibly high cash flow and achieve a high appreciation rate at the same time. Neither goal is "wrong," but a property owner needs to identify the goal and manage an investment to reach that goal.
How Do You Calculate Your ROI?
Now, let's dig into the meat of calculating your return on investmentfor rental properties. First, let's look at the cash flow method.
The cash flow formula is pretty simple: calculate your gross rental income and subtract your expenses. This number may help you answer the question, "how much can I rent my house for" to achieve your long-term income goals. For example, if you collect $1,800 for rent and pay $950 a month for expenses, your monthly cash flow is $850, and the annual cash flow is $10,200. You can compare that amount to how much you paid out-of-pocket for a down payment and closing costs to determine what your cash-on-cash return is.
Keep in mind that when you think about the ideal rental price for your property, you may need to adjust that number if your cash flow isn't what you need it to be. This is where a DFW property management advisor can provide insight into the most competitive rental pricing.
The appreciation of your property is important when you get ready to sell it. So, if you plan on only renting for a short time, then appreciation is an essential consideration to keep in mind from the start. However, if you think you will rent it out for many years, then a slowly appreciating investment will work fine (as long as you have great cash flow to match).
The appreciation calculation is simply how much more real estate investors will get from your property once you sell it, minus how much you paid for it. Given that your rental amount and expenses stay consistent, then the appreciation will likely increase with time. A property manager can tell you that how fast it increases depends on the market and location.
To calculate appreciation, a property owner can look at estimates of future growth models. Work with one of the best DFW property management companies to find market research and estimate future growth potential that could affect the appreciation returns for an investment property.
Define (and Meet) ROI Goals with a DFW Property Management Company
Defining your goals is an important first step to analyzing the potential of real estate investments. RentHub is here to help investors analyze potential investments or rental properties that are already in their portfolio, then deliver the best property management services to maximize returns. Reach out soon to learn how we can help!
Take charge of your investments now with our free resource: Calculate the ROI for Your Rental Property!