Investing in rental property has proved to be a safe and lucrative investment option for investors worldwide. Property owners are assured of stable rental income, appreciation, several tax rebates, and a hedge against inflation and economic shocks.
But, how exactly does an investor know that their investment in real estate is doing well? They make use of the returns, in particular a metric, known as the return on investment. Sounds a bit familiar? You might have heard it in your business class during your undergraduate.
To refresh your memory, the team from Income Realty Corporation has put together a few items on return on investment, ROI.
What is Return on Investment, ROI?
ROI is a performance metric that can be used to assess the profitability of a particular investment option. ROI measures the return or gains from the investment against the cost incurred in acquiring the asset.
ROI is typically expressed as a percentage. An investor can use the ROI to compare their asset’s performance against other investment options in the neighborhood or of a different class e.g. stocks, NFTs, or financial investment vehicles.
What You Need From Your Property to Calculate ROI
First and foremost, you will need to know the value of the property. If you just purchased the property with the help of a mortgage, simply check the appraised value on the appraiser’s report. For those who have owned the property for a while, you might need to call upon the services of an experienced and registered appraiser.
The good thing about the above-mentioned report is it comes with other details about your property that you will need. A typical appraiser’s report will detail the specifics of the square footage and the rental income earned from the leasing of your property.
You will also need to make an accurate and detailed list of the various property expenses that you incur. This includes monthly repairs and maintenance, payment of utilities, and property management fees. If the property is located in an HOA community, you should also add the HOA fees paid annually.
Lastly, don’t forget the annual property expenses that you pay to third-party organizations such as the insurance company, your mortgagee, and the county government (property rates).
With these details, you should have the information you need to calculate your ROI. The information on income and expenses will also accurately reveal how much you spend to maintain your rental property.
Before you arrive at the ROI, there are a few mathematical figures that you will have to calculate. Whether you're a first-time landlord or a seasoned investor, remembering each step can be tricky. Our team at Income Realty Corporation has broken them down below.
The first figures you should calculate are the Gross Income and the Net Operating Income. The Gross Income is the sum of all possible income derived from your property. This might include the rent, plus parking, income from the vending machine, and more.
To calculate your Net Operating Income (NOI), you will have to subtract your operating expenses from the Gross Income.
As a rule of thumb, an excellent ROI for your rental property is above 10%. However, few properties match up to this. Most properties fall within 7% to 10%, which is still very acceptable. The return of the property is also a factor of the level of risk associated. Keep this in mind when calculating and assessing your ROI.
To calculate your ROI:
= (Net Operating Income/ the Investment Cost) X 100
As discussed earlier, the investment cost here is the cost of acquiring the property or its appraised value.
As an example, if after all the deductions, your net operating income per annum is $25,000 and the appraised value of your rental property is $200,000, then the ROI will be:
= ($25,000/ $200,000) X 100
Our advice to you is to keep this information and apply it throughout the tenure of property ownership and leasing. Calculating your ROI is not a one-time thing. You need to continuously check how the property is performing. This will allow you to make the necessary changes either in the pricing of your rental property or in the incurring of property maintenance expenses.
Other Important Financial Metrics
While the subject of the discussion is ROI, it is not the only metric that can help you evaluate the performance of the property.
We have the capitalization rate, also known in short as the cap rate. This figure is often put forth as a percentage and it denotes the rate of return of your rental property. It is derived by dividing the Net Operating Income by the appraised value or cost of acquiring the property.
Another important metric that will help you in the assessment of your rental property is the cash-on-cash return. It is derived by dividing the after-tax annual cash flow by the appraised value of the property.
A rental property is similar to any other business. You will want to know how much cash is at hand. Cash flow for your rental property is calculated by subtracting your debt from your Net Operating Income. After deducting your mortgage repayments and insurance, the cash flow can be positive or negative.
Does this all look too technical for you? Do you find yourself out of your depth? This is often the feeling of property owners once real estate becomes technical. No need to stress yourself. Unburden yourself by contacting the leading service providers in Miami, Florida, Income Realty Corporation.
We are a full-service property management company, known for our sound and professional services and solutions. The company has been operating in Miami for over 4 decades. We are confident in our skills, experience, and expertise in all things property.
If you need help calculating the ROI for your Miami property, there is no better expert to call. Get in touch with us today. Our property managers are looking forward to hearing from you.