More and more people with no real estate investing experience are turning to rental properties to diversify their investments and secure cash flow for the future. If you want to get into the real estate market, there are several things you need to know before buying your first investment property. One of the most important aspects for a real estate investor to understand is how to evaluate the investment to assure a good rental property return on investment.
Although real estate investing is considered one of the best ways to make money and accumulate wealth, not all property investors find success in the business. Some start to lose money from their investment properties and end up drowning in debt! This is why it’s crucial to assure that your rental property return on investment is good before even buying the investment property.
If you’re thinking of becoming a real estate investor, here’s what you need to know about the rental property return on investment and how to assure you’ll be making money in real estate investing.
What Is the Rental Property Return on Investment?
Let’s cover the basics first. The rental property return on investment is, in simple words, the annual profits property investors receive from investment properties calculated in the form of a percentage. This percentage could be positive which indicates that you’re making a profit off your investment property, or it could be negative (meaning you’re actually losing money from your rental property, which is obviously something no real estate investor aims for!).
Calculating the rental property return on investment is an important task for a successful real estate investing career. Property investors use the ROI to analyze different investment properties and determine whether a certain property is profitable and will make a good investment. Moreover, when the time comes to sell investment properties, successful property investors determine the profits they should expect through calculating the ROI. Thus, the rental property return on investment helps the real estate investor make smart investment decisions.
How to Calculate Rental Property Return on Investment
To calculate the rental property return on investment, a real estate investor would need to gather a large amount of data related to the different values and metrics needed for accurate calculations. These include:
1. Cap Rate: a metric used to calculate the rental property return on investment based on the current market value of the investment property and the amount of NOI that it generates. Cap rate is typically expressed as a percentage, and it indicates the investment property’s total value that the real estate investor will make in profit on an annual basis.
Cap rate = (NOI/Current Market Value) x 100
2. Cash on Cash Return: another metric used to calculate the rental property return on investment based on the actual cash invested in the property and its NOI. Cash on cash return is also expressed as a percentage, and it reflects the rate at which the investment property will generate its profit to cover the amount of cash that the real estate investor has invested.
Cash on Cash Return = (NOI/Cash Invested) x 100
3. Cash Flow: the difference between the monthly income and monthly expenses of an investment property. It can either be positive or negative and it comes in the form of monthly rent collected from tenants. Thus, cash flow is the actual amount of profit or loss that the rental property will generate.
Cash flow = Monthly Income – Monthly Expenses
To learn more about these values and how to use them to calculate the rental property return on investment, read this article: Calculate the Return on Investment – Guide and Examples
What Is a Good Rental Property Return on Investment?
On average, 10% is what real estate experts believe to be a good rental property return on investment. However, the answer to this question remains a subjective one among property investors – one real estate investor might consider 6% a good ROI while another will only buy an investment property if it promises more than 10% ROI.
The answer really depends on a number of factors like the real estate market, the investment property itself, rental expenses, the above-mentioned values, and more. Thus, the real estate investor has to take all these factors into consideration in order to determine what a good rental property return on investment is and make smart investment decisions.
How to Get a Good Rental Property Return on Investment
Conduct a Real Estate Market Analysis
As mentioned, the real estate market plays a role in what a good ROI is. Therefore, if you want to assure a good rental property return on investment, the first thing to do is invest in a profitable real estate market. As you should know, location is key to successful real estate investing. Where your investment property is located will determine different aspects related to its profitability such as purchase price, rental income, property taxes, and more that affect its ROI. For this reason, successful property investors conduct a real estate market analysis before buying an investment property.
Conduct Investment Property Analysis
To assure a good rental property return on investment, a real estate investor will also have to analyze the investment property itself. Different investment properties yield different ROI not only based on their location but on other factors including property type, target tenants, how much to charge for rent, the rental strategy (traditional or Airbnb), etc. Different investment properties also have different cap rates, cash on cash return, cash flow, and occupancy rate – all of which determine the profitability and rental property return on investment.
To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.
Use an Investment Property Calculator
This real estate investing tool will help you make smart investment decisions in a matter of minutes! Successful property investors use this tool to do calculations and projections for an investment property to determine its rate of return on investment. Property investors simply input some basic information about the rental property (such as the purchase price, the financing method, the cash investment, etc.) and the investment property calculator will then provide them with all the crucial numbers needed to determine the rental property return on investment.
If you’re wondering where you can find this amazing real estate investing tool, then you’ve come to the right place! Mashvisor offers property investors with a versatile investment property calculator that uses traditional and predictive analytics as well as comparative and historical data. As a result, Mashvisor’s investment property calculator will provide you with the most accurate results within minutes, which adds a lot of convenience to your life as a real estate investor.
The Bottom Line
The world of real estate investing offers many financial perks. However, not every real estate investor gets ahold of them. Getting a good rental property return on investment is absolutely necessary for a profitable and successful real estate investing career. To assure a good ROI before making the purchase, you need to perform a real estate market analysis, investment property analysis and use an investment property calculator.
Sign up for Mashvisor to get immediate access to the best investment property calculator there is!
Mashvisor helps property investors find the best investment properties with the highest potential for a good ROI in any city and neighborhood in the United States. Besides the investment property calculator, property investors can also use the investment property finder tool which turns 3 months’ worth of property search into mere minutes! With Mashvisor, you can find out immediately what kind of returns a property will provide and what you need to outperform the rental market!
To start your 14-day free trial with Mashvisor and subscribe to our services with a 20% discount after, click here.