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! While not every investor can buy a Seattle rental property with cash (and without financing) if you're able to cover the cost of a new investment without a mortgage, here's how to evaluate your return on investment.
What Is a Cash Property?
Raising funds and buying a rental property—without using a mortgage to finance it—leaves you with a cash-purchased rental. In most cases, purchasing a rental outright without a monthly mortgage payment improves your returns sooner rather than later.
The formula to analyze the ROI for cash-purchased properties is reasonably straightforward. Without the additional cost of a monthly mortgage payment, here's how to calculate your returns.
Start the Formula With the Purchase Costs
The purchase price 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 in question. 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 get the home ready 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:
- Landlord Insurance
- Marketing costs
- Property management fees
- Utilities (if you include them in the rent price)
- Property taxes
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. You generate $101,280 in rental income after twelve months of steady rental payments.
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 $60k in revenue after the first year, that number isn't the ROI (return on investment). To calculate that number, divide the annual return ($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%.
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!
If you want 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.
Don't Forget Your Time
Unfortunately, most ROI calculators don't consider your time spent on managing a Seattle rental property—and that's an expense too. Sometimes the biggest "cost" to your bottom line is your time and effort managing rentals on your own!
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 also 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 Rental Property 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! It's also critical to know the strategies that can help boost returns and help you meet your long-term financial goals. Our team of property management experts has years of experience in real estate management! The team at Real Property Associates 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.
Learn more about how to analyze ROI! Sign up for our free Rental Property ROI Calculator.