Published July 21, 2021. Updated June 8, 2023.
If you invest in rental properties with cash as your only form of investment capital, we have some insights for you to help analyze your success!
Not every investor can buy a Seattle rental property with cash (and without financing), and that's okay! Many real estate investors use financing to purchase investment properties and have a monthly mortgage payment for those properties.
However, if you can cover the cost of a new investment without a mortgage, our experts put together some tips on how to evaluate your return on investment.
What Is a Cash Property?
Buying a rental property outright with cash instead of using a mortgage can offer distinct financial benefits, including improved returns on investment (ROI).
When you opt for a cash purchase, you avoid monthly mortgage payments, eliminating a substantial recurring expense from your budget. This enhances your ROI sooner, as you start profiting much earlier compared to a mortgage-financed property.
The formula for calculating ROI on cash-purchased rentals is simpler, too. Because you've sidestepped the mortgage, you can directly measure your returns by comparing your rental income to the initial purchase price and ongoing expenses. This straightforward approach makes it easier to analyze your property's financial performance and helps in the quicker recouping of your investment.
Calculating ROI for a Cash Rental Investment
With an understanding of a cash property, what's the formula to evaluate returns? We break it down next.
Start the Formula With the Purchase Costs
The purchase price of an initial investment is the total amount of money you put into acquiring your cash-purchased Seattle rental property. This number should include the home's sale price plus applicable fees, taxes, and closing costs as the "final" cash price to own the property.
If it's an all-cash Seattle investment, this number should be clear and easy to find on a document from when you purchased the real estate investment. Make sure you start with an accurate number to start the formula, or you risk generating a return on investment that could be too high or inaccurate.
For example, you closed on an investment property with these final numbers:
Home sale price (including taxes) = $800,000
Additional costs = $24,000
Total cash price = $824,000
Then, you conducted $20,000 worth of updates and renovations to prepare the home for renters. Your total starting investment in this rental property is now $844,000.
Include Real Estate Operating Costs
Buying the home isn't the last expense you'll incur to operate the rental legally in Seattle. Property owners must factor in additional costs when evaluating the return on investment, including:
Property management fees
Utilities (if you include them in the rent price)
For this example and the rental property purchased above, these costs add another $40,000 to your annual real estate operating expenses. Next, we'll talk about income.
Rental market analysis determines that the ideal monthly rent amount for this property is 1% of the purchase price, or $8,440. Therefore, you generate $101,280 in rental income after twelve months of steady rental payments.
Next, go back to your operating costs and determine your annual return by subtracting your operating expenses from the annual rental income. After one year, your new investment made a profit of $61,280.
Find Your Return On Investment
While you might (or might not) be pleased with $61k in revenue after the first year, that number isn't the ROI (return on investment).
To calculate your returns, divide the annual net income ($61,280) by the total purchase price (including all initial costs).
Your ROI based on these hypothetical numbers is .072.
Since ROI is a profitability ratio, transform that number into a percentage by multiplying it by 100. You'll now see that the ROI in this scenario is 7.2%.
Rental property owners should run this calculation for each property in a real estate portfolio to calculate ROI for each investment.
How to Improve ROI
Is 7.2% a "good" ROI? It depends on your goals and the market. However, the number you see after one year isn't permanent. ROI can change depending on a variety of factors and management strategies!
To improve ROI for a rental property, Seattle landlords should consider:
Increasing rental rates to generate more real estate income
Decreasing operating costs by keeping an eye on the maintenance budget, using online rental payment options, or employing Seattle property management services.
Applying strategies that pay off, like boosting tenant retention, minimizing vacancy times, and developing a proactive maintenance plan to prevent expensive repairs.
In general, experienced property managers recommend an ROI of 8% or more as a good goal for any rental property.
Don't Forget Your Time
Many ROI calculators focus purely on financial factors and often overlook the value of your time spent managing a rental property, especially in a competitive market like Seattle. However, time for a property owner who self-manages rental properties is a critical resource and constitutes an "invisible" cost to your bottom line.
Whether it's coordinating maintenance, handling tenant complaints, or ensuring legal compliance, the hours you dedicate to managing your rental can accumulate significantly. These time commitments can sometimes outweigh the financial gains, making self-management less lucrative than it appears.
So, when calculating ROI, it's essential to factor in the value of your time alongside monetary expenses to get a comprehensive picture.
Maintain Better ROIs With Expert Property Management
If you like the ROI you see after running the numbers on rentals in your real estate investment portfolio, maintaining those returns is your next challenge. Much like ROIs can improve, they can decline without extreme attention to detail and the right experience and strategies for consistent success.
As you add more rentals to your portfolio, the work it takes to generate positive returns grows! Partnering with a Seattle property management company is the best way to find rentals with excellent potential for good ROIs and maintain the returns you need to achieve your goals—year after year.
Maximize Returns With the Best Seattle Property Managers
If you want to maximize the return on investment for your rental property, then it's important to know how to calculate the ROI! Knowing the strategies that can help boost returns and help you meet your long-term financial goals is also critical.
Our Real Property Associates team of property management experts has years of experience in real estate management! We would love the opportunity to show you how to achieve a higher income with lower costs to maximize ROIs. If you're ready to get more out of your rental properties, let's talk.
You can also learn more about how to analyze ROI when you request access to our free Rental Property ROI Calculator.