One of the main reasons to invest in real estate is, of course, for additional income. Whether that income is primary or secondary, property owners are looking for a good return on investment.
There are plenty of interpretations of how to calculate the return on investment (ROI), but they can vary in accuracy and usefulness. ROI is one number that every property manager should know with a consistent calculation method, and this article will teach you how to calculate ROI accurately for your residential rental property in McKinney.
How to Calculate ROI for Rental Properties
To determine the profits or gains you make from an investment property, take the original cost of the investment and subtract it from the total returns. To help illustrate, let's say you buy a rental property and charge $1,300 rent per month, giving you an annual rental income of $15,600. For simplicity's sake, we will assume that you only pay $1,000 a month for the mortgage. Since your yearly expenses on the property would equate to $12,000 per year, and you are bringing in $15,600 from the tenants, your annual income, in this case, is $3,600.
The total return on investment for your McKinney rental property will not be determined until you sell the property. Still, this calculation helps investors determine the annual ROI and analyze how the number tracks against long and short-term goals. ROI helps you determine whether your monetary investment and your time commitment to this business are worth it and how much profit will be generated by the end of the year. This metric also helps investors recognize when a property isn't generating enough returns and how to make changes to boost those numbers.
ROI Is a Percentage
If you're wondering why the calculation returns such a small number, remember that return on investment is a ratio best represented as a percentage.
As an example, let's say an investor buys stock for $500. They sell it after two years for $1,500, making a net profit of $1,000 ($1,500-$500). The return on investment, in this case, is 50%. The figure is attained by taking the net profit ($1,000) and dividing it by the total cost of the investment ($500). The answer (0.50) is multiplied by 100 to convert it into a percentage. This is the simplest way to determine ROI. However, McKinney property managers can tell you it is not always this easy! Investors must also include ongoing costs when determining ROI.
Variables That Affect ROI for Rental Properties
While income and initial costs are simple numbers for a simple ROI formula, you won't often find a rental property that doesn't incur additional costs throughout the year. Several other variables can impact the return on investment for rental properties. These variables include:
Financing terms can significantly affect the overall cost of your rental property and reduce your ROI. If you bought your investment property using an adjustable-rate mortgage, you might need more complex formulas to calculate the ROI of the property. Investors can either use the cost method or the out-of-pocket method to determine the ROI.
Other factors that could impact the ROI are the monthly rent rate, whether you allow pets on the property, miscellaneous monthly dues (such as HOA fees), unexpected expenses, and more. Property management professionals can assist with in-depth calculations to determine your investment's performance and implement best practices to improve ROIs.
ROI Isn't Forever
Investors should note that ROI does not represent profit in your pocket at the end of the month or year. Plus, your ROI for one month or a year won't necessarily stay the same next month or next year.
If you're unhappy with the results after calculating the ROIs for McKinney rental properties, rental property owners can make changes to operations, upgrade rentals, adjust the rental rate, and apply other strategies to boost returns. If your ROI comes back on target with your long-term goals, make sure you identify the strategies working together to hit those numbers and keep up the excellent work!
Work with a McKinney property manager to make smart upgrades, find quality tenants, improve rental rates, and supply valuable experience to maximize returns and build more future income from your real estate investments.
Optimize ROIs With a McKinney Property Management Professional
The ROI of a real estate investment gives you an idea of whether a property is performing well or needs help to meet your income expectations. Calculating ROI depends on several variables and can get complicated without the right expert insights to gather costs and evaluate income. Partnering with experienced McKinney property management professionals helps investors understand the financial performance of rental properties and how to ensure investments meet long-term goals.
RentHub can help you analyze ROI and apply the right strategies to maximize returns! If your numbers aren't where you'd like them to be (or you're not sure what they are), let's connect and work through it!
Use our expert tool to calculate ROI! Click for free access to "Calculate the ROI for Your Rental Property."
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