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How To Calculate ROI For A Rental Property

When investing in rental properties, be sure to run these numbers to assess the ROI of your prospective investment.

The real estate market is incredibly active right now – yet it’s important that both experienced landlords and first-time property owners keep a level focus on efficiency.

If you’re a real estate investor, you must consider how profitable a given property investment you’re planning to make is truly going to be. To do that, you need to work out the potential return on investment, or ROI.

This sounds complex, but no need to reach for the phone and call your accountant just yet. With the right approach, you can calculate ROI for a rental property by your own initiative – and we’ll be exploring how today.

Is calculating rental property ROI difficult?

Your own confidence with numbers notwithstanding, you should find it relatively simple to calculate ROI on your latest property venture. The key is working out if the level of profit you’ll bring in is acceptable, versus how much you’ll be spending to take ownership of the property in the initial instance.

However, keep in mind that the way in which your property is purchased has some bearing on your ROI calculations.

For example, a property bought with an outright cash offer is an easy asset to calculate ROI for. If purchasing property with a mortgage, additional variables may cause the calculation to be more complex.

What calculations are involved in determining your property rental ROI?

There are several factors to take into consideration when calculating rental property ROI. The first is, of course, the expenses you’ve endured in taking ownership of the property overall.

Remember, this isn’t just the price you’ve paid for buying the property first of all – be that cash offer or via a mortgage. These expenses you’re aiming to recoup also include redecorating costs, property taxes, and any maintenance or repair bills you might unexpectedly incur along the way.

First, factor in annual expenses

Rather than the cost of the property purchase, it’s the smaller expenses that add up to affect your ROI. For example, let’s say the accumulated taxes, insurance, and upkeep costs of your property clock in at $200 per month. That amounts to $2400 per year. If you’re renting the property out for $1000 in rent per month, that’s $12000 per year. Deduct $2400 from $12000, and you’re left with your annual return minus expenses of $9600.

Second, factor in the cost of your property purchase

With your annual return figure now in hand, you’re able to calculate that against the purchase cost of your property. Remember, that isn’t just the cost of the building itself, but also any agent fees, closing costs, and remodeling work you’ve had to pay for. For example, let’s suggest the property cost you $100000. On top of that, you paid $1000 in closing fees and $9000 in renovations. That leaves you with $110000 in expenses.

Here’s where the real ROI calculation comes into effect. Your $9600 in profit÷ $110000 is 0.087, making your ROI just over 8%.

How ROI is calculated if you’re also paying mortgage payments

The above calculation works well for determining the ROI of your property when you rent it out. However, as we hinted at earlier, there’s a touch of extra complexity to keep in mind if you’re calculating ROI on a property rented out while encumbered by a mortgage.

This isn’t anything to be troubled by – there are just a few other steps to consider. For example, if your property costs $100000, but you’ve already put down a mortgage deposit of $20000, we have that figure to hand already.

Yet there are other financial outlays to consider as well. With closing costs on mortgaged properties typically coming in higher than they do on properties bought via cash offers, you could see up to $3000 in expenses added to the $20000 we just discussed.

Once again, there may be renovations. Let’s use an example figure of $7000 to bring the running total up to $30000. Keep that figure in mind as we explore other expenses that arise throughout the year. For example, taxes, insurance, and so on will still apply – $200 per month, for example, at $2400 per year. Naturally, your own mortgage payments also apply – for example, a figure of $400 per month would amount to $4800 per year. Therefore, take your annual rental income of $12000, subtract $2400 for taxes and insurance, then $4800 for your own mortgage costs. That’s an annual return of $4800. Apply that return to your $30000 outlay, and there’s your ROI: $4800 ÷ $30000 = 0.16, or 16%.

How do you determine a good rental ROI amount?

The amount you can charge in rent and the expenses you’ll incur as a property owner are naturally going to differ from place to place. Doing your own research into your surrounding city, wider municipality and the nature of your local rental market will help you make an informed decision.

However, both new and experienced landlords tend to agree that any ROI between 5% and 10% is a very positive position to be in. In fact, if you’re able to determine an ROI figure above 10%, you’re potentially onto a real winner.

Of course, being a landlord is not always easy. Similarly, this isn’t a way in which you’ll make huge money overnight – by its very nature, renting properties out is something of a slow burn.

The key to keeping your ROI high is to minimize the expenses that pile up over the financial year. While you’ll have a duty to pay for repairs when required and maintain the property to a liveable standard, the unexpected can often catch even seasoned landlords unawares. A good insurance policy is often the smart way to go.

Nonetheless, the real secret is intelligently tracking your finances. A predictable rhythm of monthly income is always going to work in your favor – and you’ll sustain tenants long term by being fair and transparent too. 

To track these finances accurately, be sure to use a proper accounting system like Quickbooks Online. Once using a system like Quickbooks to track your investments, consider using property management software to help track your rental properties and handle the non-financial tasks that accounting software does not offer, such as work orders, communicating with tenants, and signing new leases. Thankfully, Rentroom has a direct integration with Quickbooks with class-tracking, allowing all of your rental transactions and property fees to sync to their corresponding locations within Quickbooks Online while processing online payments and providing all of the convenient benefits of property management software.

Interested in viewing this integration, or our workflow with Quickbooks Desktop? Sign up or Book a Demo with Rentroom today!