Published November 10, 2021. Update August 24, 2023.
There is probably one metric that property owners monitor above the rest in the real estate investing industry: return on investment (ROI).
If you're an investor in the Detroit area, knowing the bottom line for every rental in your portfolio is essential. In other words, are your investments profitable? Will a potential property be profitable?
Even though certain properties may appeal to you for various reasons, it's critical to assess the ROI to make sure you're staying on track. Of course, ensuring you have the best rental rate is an important component of your ROI, but that's not the only factor determining returns.
When analyzing your ROI on a rental property, our team of experts, as the best property management company Detroit offers, has all the details about calculating and optimizing return on investment! Keep reading to learn how to calculate returns for properties in your portfolio or investments you have your eye on.
Understanding Return on Investment
ROI isn't unique to rental properties. Investors calculate the return on investment for stocks, bonds, savings accounts, and real estate to help them make informed investment decisions and build wealth.
Return on investment is a way to understand how much money, or profit, you make on an investment. This amount is expressed as a percentage, so it's more easily understood as a profitability ratio.
Understanding ROI helps people in the real estate investing industry keep track of how their investment dollars are being spent and what they're getting back in return. While having money left over at the end of the month is a good sign, it's not the best indicator of "profitability."
Your ROI on a rental property is a bottom-line number that indicates how much profit you get from the investments after expenses. With this information, you can decide how to spend investment dollars growing your portfolio!
The Calculation for ROI on a Rental Property
What is the calculation for ROI? The basic formula for rental property return on investment on a rental property is:
Annual net profits (or return) ÷ cost of investment
Let's review what these terms mean for more clarity.
First, your investment cost is how much you initially paid for the property and any money that went into upgrades or renovations.
Then, your net profits must factor in how much you collect in rent and the property's expenses.
So, if you collect $1,800 a month in rental income but have $300 in expenses, then the monthly return would be $1,500. The annual income would be $18,000.
An Example Calculation
Now, let's plug some numbers into this formula to get an actual ROI on a rental property. For example, if you paid $150,000 for a property and put $10,000 in it for upgrades, your cost for this investment property would be $160,000.
Then, with a monthly rent amount of $1,200 and $100 per month in expenses, the annual return would be $13,200 or ($14,400 - $1,200).
Next, divide the annual return ($13,200) by the investment cost ($160,000), and you'll get 0.08. To convert this to a percentage, multiply by 100 and get 8% for the property's ROI.
Most property managers would suggest that an ROI of 8% is on the low side for a rental property. However, it's still within the range of acceptable rates.
Our Metro Detroit property management company experts recommend returns between 8-12% as a good target for a successful rental property. Imagine building a residential real estate portfolio with properties generating 8-12% returns! You'll be on your way to generating tremendous wealth!
What To Do If Your ROI is Not High Enough
When calculating your return on investment, sometimes, the numbers reveal a less-than-ideal situation.
If your ROI falls below the benchmark of 8%, property managers recommend taking immediate action to reevaluate your rent structure or find ways to cut down on maintenance, utility, or other operational costs.
However, it's essential to keep perspective, especially if you have a diverse real estate portfolio. A single underperforming property is unlikely to devastate your overall financial health if your other assets generate higher ROIs. In such cases, you might consider reallocating resources or attention to the more profitable properties while developing a strategic improvement plan for the underperforming ones.
Alternatively, you might find opportunities to boost the low-ROI property's income, whether through rent increases, added amenities, or cost-effective renovations that could make it more attractive to potential tenants.
Balancing your portfolio can ensure long-term stability and financial success.
When calculating ROI for a residential real estate investment, it can be a bit more challenging than presented above if you've financed the home. ROI for financed properties must also include monthly mortgage payments, the down payment amount, and any additional fees to purchase and manage the property.
There are also some variations due to the expenses you may pay. For example, you might hire a company to manage the rental with professional property management services.
Real estate investors must also pay property tax and insurance on the property. If you're not sure how to calculate return on investment when factoring in all operational costs, a property manager can help!
Boost Rental Property ROI With Professional Property Management Services
Optimizing your return on investment is easier with the best property management company Detroit offers! When hiring property managers for rental properties, your bottom line benefits from full-service property management for various tasks, including rent collection, property maintenance, tenant management, and much more.
Plus, with our experience in the Detroit market as one of the best property management companies, we are the ideal partner to help real estate investors find ROI-producing properties and manage them successfully to build profitable portfolios.
Reach out to Own It Detroit if you're ready to boost ROIs for Metro Detroit rental properties!
Or, get started by checking your ROIs today with our free Rental Property ROI Calculator!