One of the most important factors to consider before investing in rental properties is ROI real estate. How can you improve it as an investor?
- What Is ROI in Real Estate?
- What Is a Good ROI in Real Estate?
- How to Improve ROI Real Estate Rental Property
- Use Mashvisor Tools to Increase Your ROI Real Estate
There are multiple ways to make money in real estate. Residential property is one surefire way of building your wealth and diversifying your portfolio.
Although residential properties are a lucrative venture, you don’t just invest and take a backseat. You need to implement a few property management strategies to boost your return on investment (ROI).
Fortunately, most of these strategies aren’t rocket science. They’re straightforward. This is what we’ll be looking at in today’s blog post.
Let’s start with the basics.
What Is ROI in Real Estate?
Return on investment (ROI) refers to the amount of income that an investment generates in comparison to the cost of investment. Nobody wants to run a business that ends up making losses or consuming more money than it generates. This is the essence of calculating the ROI.
Basically, real estate investors use an ROI real estate calculator to determine whether the investment makes financial sense or not. It’s best to calculate a property’s ROI before purchasing the rental since it gives an insight into the profits you should expect to make. In short, calculating a property’s ROI tells the investor whether it’s a wise investment or not.
Learn More: What Is ROI in Real Estate? A Complete Guide
How to Calculate ROI
From the description, we can deduce that the ROI formula is as follows:
ROI = (Investment Gain – Expenses) / Cost of Investment
For example, let’s assume you bought a rental property at $200,000. You went ahead and spent $18,000 on renovating the property and a further $2,000 on closing expenses. As such, the total initial investment is $220,000.
You collect a monthly rent of $2,000. Assuming you enjoy a full occupancy rate, you’ll have made $24,000 in rental income in one year. All expenses incurred, including property taxes, insurance, and amenities, add up to $2,500 for the year. This is how you’ll calculate your ROI:
($24,000 – $2,500) / $220,000 = 0.097 or 9.7%
However, you need to keep in mind that the return on investment formula doesn’t assure you of a positive return on investment. Your return on investment is influenced by property management. Ultimately, the real estate ROI is determined by what you do, not the numbers you get from your calculations.
What Is a Good ROI in Real Estate?
If you buy your investment property fully in cash, then you should calculate ROI using the cap rate. Basically, the cap rate is an ROI metric that calculates the returns based on how much income the property generates compared to the investment made. Here is the cap rate formula:
Cap Rate = (Net Operating Income / Purchase Price) * 100
Net operating income refers to your annual rental income minus the annual operating expenses (not including mortgage and interest rates). Let’s calculate the cap rate using the example above. Assuming your operating expenses add up to $4,000, your NOI will be $20,000 ($24,000 – $4,000). Following the above formula, you’ll get a cap rate of 10%.
Related: How to Find Cap Rate for a Real Estate Market
So, what is a good ROI for real estate investments?
Anything from 4% to 10% is a good cap rate. While this number varies depending on the location, keep in mind that the higher the cap rate the better the return on investment.
That said, here are some ways to improve your investment property’s ROI.
How to Improve ROI Real Estate Rental Property
Regardless of the type of property, you’re investing in, whether it’s a single-family home, multi-family unit, condo, or townhouse, there are several tips you can implement to make more money from your rental and boost your ROI real estate.
Let’s look at some of these important pointers:
1. Create a Quality Marketing Strategy
As a rental property owner, you need to put your home out there for as many people as possible to see. Otherwise, you won’t secure the kind of tenants you’re looking for and you’ll have to endure long periods of vacancies. Also, you want tenants who’ll take care of your property and assure you of timely rental payments.
Traditionally, rental property owners would simply put up signs on their property or market in publications. However, some of the strategies will barely work today. Quality marketing is the backbone of any successful business.
One of the most important aspects of quality marketing in this age is taking quality property pictures. While you may have a smartphone with a high-quality camera, you may have to consider hiring a professional photographer who understands aspects of good photography, such as lighting and framing. It’d even be better if you found a photographer with an impressive experience in real estate photography.
After this, you can upload the photos alongside a detailed description on listing platforms. You can even upload on your social media pages to engage with potential tenants directly.
The key to marketing your rental property is staying on top of quality. Whether it’s the property photos or the description, ensure everything is top-notch. This will guarantee you of reaching your target market.
Learn More: 15 Property Management Marketing Ideas
2. Stay on Top of Tenant Screening
Nothing kills your ROI expectations like problematic tenants who won’t pay the rent on time or who end up causing damages that will eat up your profits. If it gets to a point where you have to evict them, you’ll have to spend a considerable amount of cash to finalize the process.
This is why you ought to pay special attention to your tenant screening to ensure that your tenants will pay on time and keep your property in great condition. The tenant screening process includes:
- Tenant history checks
- Background checks
- Credit history
- Employment checks
- Criminal record
This process is meant to help you see whether they’ll pay the rent on time, if they have any past evictions, or if they make at least three times the rent. In case they have any past evictions, you can ask why to see if they have any logical reasons. It might also make sense to contact their former landlord to see if the prospective tenants have any history of property damages or late payments.
If this process seems arduous, you can consider working with a property management agency that can run the background checks for you. Also, keep in mind that there’s a legal way to carry out tenant screening. Be sure to adhere to the rules and regulations to avoid trouble.
3. Price Your Rent Competitively
Your rental rates can make or break your ROI real estate. Ideally, you want to earn the most you can without losing potential income during long vacation periods.
One great tip to set competitive rental rates is to look at rental comps. For starters, real estate investors use rental comps to look at other similar comparable rental properties within the same neighborhoods. You can access rental comps data and see what other landlords with the same type of property in your market are charging.
Book your Mashvisor demo today and access rental comps:
You don’t want to set a price that’s too high that tenants would prefer your competitors’ properties. On the other hand, a lower rental rate will mean you’re leaving some cash on the table and won’t make enough profit. Don’t forget to factor in what you offer and any property amenities that you could leverage to charge a higher price.
You can start high and slowly adjust the rate downwards. If no one is calling you after listing your property, know you’re charging too high. Similarly, if your phone can’t stop ringing every minute, you might want to rethink your price.
See what’s the maximum you can get, but don’t let the property sit vacant for too long, or you’ll compromise your real estate ROI.
4. Improve Your Curb Appeal
Aesthetics are a core factor when it comes to ROI real estate. Potential tenants judge your home from the way it looks outside and set expectations based on your curb appeal. This is why you need to work on it and ensure it’s top-notch.
Here are some easy pointers to boost your curb appeal:
- Take care of your lawn by mowing the grass, trimming the shrubs, pulling out weeds, and raking the dead leaves.
- Add some fresh greenery by planting flowers.
- Paint your front door using bold colors to make it stand out rather than blend in.
- Swap your old mailbox out for a newer and more stylish one.
- Clean the inside and outside of your gutters. Clear the debris inside and scrub the outsides to ensure they look new.
- Power wash your garage door to clean it, and maybe consider repainting it.
- Take care of repairs such as blown bulbs, chipped paint, or ripped screens.
The trick with your curb is that keeping it neat will leave the right impression on potential tenants, keep them interested, and have them pay the desired rent.
5. Provide a Pleasant Experience
Once you’re done with the exterior, it’s now time to focus on the interior. To get the interest of quality renters, you need to prepare for upcoming rental property showings.
Start with the basics. Clean the entire interior and make it as spotless as possible. A clean property will undoubtedly raise its value. In addition, it’ll raise tenants’ expectations as they’ll see how it should be maintained.
Remember that you want to make the property more inviting. One way to do this is using natural light. Open the blinds and freshen up the property using subtle scents. Be careful not to overdo it since strong scents can irritate some potential tenants. Ensure the scent is inviting and pleasant.
Since you want to provide a memorable experience to the tenants, you can provide some baked goodies during showings or a small gift, such as discounts to local businesses.
A pleasant experience will leave the tenant with the desire to come back and sign the lease contract.
6. Invest in the Ideal Property Type
The property type is another vital factor that influences your ROI real estate. Common property types include single-family homes, multi-family units, condos, townhouses, apartments, and many others.
The ideal property type depends on your housing market and rental strategy. Different real estate markets offer different rates of returns for different property types. As such, ensure you invest in the right property type for your location.
When it comes to rental strategies, single-family homes are ideal for the traditional rental strategy. This is because most long-term tenants will be looking for a place to live with their families. They’re likely to rent bigger properties away from the city centers.
On the other hand, condos and apartments near the city center are ideal for the short-term rental strategy. This is because short-term renters are looking for places near tourist attractions and business hubs.
7. Select the Best Rental Strategy
Your rate of ROI real estate is influenced by your rental strategy. Many investors are now acquiring short-term rentals due to their high-income potential. However, you don’t have to follow blindly as it could lead to costly mistakes.
Perform a comprehensive rental property analysis before investing your money in any property. This is the only way to tell whether you should follow the traditional rental strategy or start an Airbnb business.
Luckily, Mashvisor has tools that enable you to carry out in-depth market and property analyses. Our Property Finder tool allows you to access profitable property listings in any market in the US. You can use various filters, such as selling price, property type, and location, to find properties that match your requirements.
After that, use our real estate ROI calculator to do the ROI calculation. Simply click on any property on the platform that has spiked your interest or enter any property’s address and access a detailed investment property analysis. You’ll get accurate numbers for the following traditional and Airbnb rental metrics:
- Rental income
- Cash flow
- Cash on cash return
- Cap rate
- Occupancy rate
When carrying out market and property analyses using Mashvisor ROI calculator real estate, you don’t have to worry about accuracy. This is because we get our data from reliable sources such as the MLS, Zillow, and Airbnb itself. You’re assured of getting up-to-date information from actual landlords, not investors who tried and failed.
Since properties are a long-term investment, you need to constantly dedicate your time and energy to increase your ROI real estate. By working on smart marketing, tenant screening, and property presentation among other strategies, you’ll be able to experience a positive cash flow within no time.
On top of all that, you need to use Mashvisor tools to streamline your investment tasks. Our tools are designed to help the modern real estate investor to make smart and data-based investment decisions. Say goodbye to conducting tedious and error-prone manual real estate calculations and analyses.
Sign up to our platform today and begin your 7-day free trial.