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, it's important to know the bottom line for every rental in your portfolio. 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 it comes to analyzing your ROI on a rental property, the best property management company Detroit offers has all the details about how to calculate and optimize return on investment!
Understanding Return on Investment
ROI isn't unique to rental properties. Investors calculate the return on investment for stocks, bonds, savings account, and real estate. 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 leftover 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 are getting from the investments after expenses. When you have this pertinent information, you can decide how to spend investment dollars growing your portfolio!
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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 the 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.
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 rent 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 by the annual return ($13,200) by the investment cost ($160,000), and you'll get 0.08. To convert this to a percentage, you can 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. A Metro Detroit property management company recommends returns between 8-12% as a good target for a successful rental property.
What To Do If Your ROI is Not High Enough
Sometimes after calculating your ROI, you find out that it isn't what you'd hope it would be. If it falls below the minimum 8%, you may need to reconsider your rent amount or reduce the expenses. However, if you own other properties and they bring in a higher ROI, then one property at the lower rate probably won't make or break your portfolio as a whole.
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Other Factors Affecting Return on Investment
When calculating ROI for a residential property, 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 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. Reach out to Own It Detroit if you're ready to boost ROIs for Metro Detroit rental properties!
Check your ROIs today with our free Rental Property ROI Calculator!
