Tips and Tricks to Understand and Calculate ROI on a Rental Property

By Real Property Associates

Real estate investment professionals need an accurate assessment of their return on investment. Return on investment (ROI) is a key metric to help investors assess the profitability of a rental property. Seattle property management experts can assist with calculating return on investment. Multiple methods exist for the calculation process. It all depends on your variables, how you want to calculate the potential return, and what you measure as success or failure. 

Here's what investors need to know!

Return on investment background

Understanding Return on Investment

The basis of return on investment requires understanding for you to be a successful real estate investment professional. A Seattle property management expert can explain the return on investment in detail and help you go through the processes to calculate, but starting with a basic understanding of ROI calculations is a good idea.

Return on investment is a measure of the profit generated from your real estate investment property. The return on investment gets a percentage representation. The percentage is an output when you compare the revenue you bring in up against the expenses to buy the property, maintain it over time, and more.

The higher your return on investment (ROI), the more effectively and efficiently your properties operate! Some real estate investment properties in Seattle will net positive returns on investment, while others will put you in the negative. If your ROIs are low (or negative), it's time for expert help from a property manager!

The Value of Knowing Your ROI

Any real estate investment professional must know the health of their portfolio. The ROI allows for an assessment of each property as well as the portfolio at large. The best property management Seattle offers not only helps investors analyze potential rental properties and how current rentals perform, but they also recommend and implement strategies to improve ROIs when a property falls short of your goals. 

No matter how many properties you own, every investment should generate the best return possible to deliver a profitable portfolio overall. The higher your return, the bigger your win on the investment itself.

Challenges of Calculating Return on Investment in Real Estate

Challenges exist when trying to calculate return on investment in the real estate space. Residential property values and other variables are prime for manipulation. Someone assessing a property may value it much higher or lower than you expect. Their assessment can impact the value and significantly impact your return on investment calculation at a point in time. 

With Seattle real estate, make sure you understand the variables and the ideal calculation to get an accurate picture of a property's ROI. When you include or exclude certain variables from the calculation, the return on investment number becomes murky, unreliable. 

Cropped view of businessman near scales with money bags and carton house isolated on white

Two Common Types of ROI Calculations

Most investors rely on two common types of return on investment calculations in the real estate space. The calculations are: return on investment for cash transactions versus those that go through financing. 

The Cash Transaction Scenario

With a cash transaction return on investment, investors analyze a Seattle property when the purchase was made with cash. For example, you made a payment of $300,000 in cash to purchase a rental property without any additional financing. You then factor in what you put down to close on the property, as well as any costs for remodeling work.

Assume you paid $2,500 in closing costs and another $7,500to do minor remodeling to get the property ready for rent. Your total cash outlay is now up to $310,000 in total. 

The rent you collect for this cash transaction is the next piece of the puzzle, set at $2,000 per month. When you estimate a year's worth of rental income, you take in $24,000. You also face a variety of bills of $5,000 in total. Your return for the year in rental income is your $24,000 minus your $5,000 in expenses, bringing you to a profit of $19,000. 

To calculate the ROI of profit vs. expenses, you take $19,000 and divide it by the $310,000 in cash. The ROI value is 6.129% for a rental property purchased with cash with these estimated numbers for rental income and annual expenses. 

Buying With a Mortgage

The other method of calculating return on investment applies to rentals purchased with a financed mortgage. The calculation starts the same as analyzing ROI for a cash purchase, where you calculate the out-of-pocket expenses. Then, property mortgage and interest costs will also factor into your ROI calculation.

No matter how you purchase a property, keep a close eye on the ROI year after year, and work with a Seattle property management company to maximize your returns!

Determine Your Return on Investment Now

Seattle property management professionals help investors calculate and maximize ROIs for every rental property. An accurate estimate of your ROI can give you a baseline of the success of your real estate portfolio. If you're not sure about the math or how to improve the returns on a property that isn't performing well, Real Property Associates is here to help! Let's chat.

Use our free ROI Calculator: A Step by Step Guide to Calculating the Return on Investment For Your Rental Property, today to understand rental property ROIs!


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