Your number one goal as a real estate investor is to generate a high ROI on rental property. But if you’re a beginner, it can sometimes be hard to know what you’re supposed to do to reach this goal. So in today’s blog post, we’ll tell you how to achieve a high ROI on rental property every time.
What Could Keep You From Generating a High ROI on Rental Property?
In order to understand how to generate high ROI when managing or buying rental property, you need to know why some real estate investors are unable to achieve a high return on investment in the first place. Here are the three main causes of a low ROI:
Earning a Low Rental Income
As you would expect, the most obvious cause of a low return on investment is low rental income. With a low rental income, an investment property’s cash flow suffers. Some properties that generate low rental income become negative cash flow properties; others simply bring a lower return on investment.
Let’s use an example to clarify this concept.
Say you have a $300,000 duplex. If you were to only charge $200 in monthly rental income per unit, with annual expenses reaching $1,000, your ROI would be:
ROI = Annual Returns ÷ Cost of Investment
ROI = [($200 x 2 units x 12 months) – $1,000] ÷ $300,000 = 1.3%
Because of the low rental income, the duplex generates a low annual rate of return.
Paying Too Much for Rental Property Expenses
Low income is the most obvious barrier to a high ROI. However, it is not the most common. That would be paying too much for expenses. This situation can occur if expenses are not properly reviewed and reduced where possible. It can also be due to unexpected maintenance issues.
Let’s revisit the previous example. This time, you’re charging a high rental rate of $500 per unit. However, the rental property expenses amount to $5000 as opposed to $1000 annually:
ROI = [($500 x 2 units x 12 months) – $5,000] ÷ $300,000 = 2.3%
While the ROI is higher than the previous calculation due to the increased rental income, it is not the highest ROI possible for the property, due to the fivefold increase in expenses.
Buying Expensive Investment Property
Finally, buying rental property that is too expensive will stunt your return on investment. See what happens when the duplex’s price is doubled, keeping total expenses at $1000 and monthly rental income at $500.
ROI = [($500 x 2 units x 12 months) – $1,000] ÷ $600,000 = 1.83%
How to Achieve a High ROI on Rental Property: 5 Tips
The best way to have high ROI investments is to create the opposite scenarios for your rental property to the ones listed above. Of course, this is much easier said than done. Nonetheless, there are practical methods for ensuring high rental property investment returns.
Invest in Affordable Properties
Based on our previous examples, investing in pricey properties has a large effect on ROI. Luckily, it is fairly easy to focus on finding investment properties for sale that are affordable. Be sure to properly set your budget and use Mashvisor’s search and analysis tools to find affordable properties. Our heatmap tool will help you identify affordable areas with high return on investment properties for sale. Try it out now.
Maximize Rental Income
Contrary to popular belief, if you want to be able to earn a high rental income, you have to put in the bulk of the work before buying an investment property. The first step is to conduct real estate market analysis and find a market where you can earn a high monthly income. Check out this list of the 50 best cities for rental income.
From there, you need to find neighborhoods where rental properties make good money. This requires a neighborhood analysis. Finally, you’ll need to analyze individual properties to determine how profitable they will be. In order to do that, you need to use a real estate investment app, such as Mashvisor. Using Mashvisor, you can conduct a neighborhood analysis and an investment property analysis to find properties that will generate a high enough rental income.
Related: What’s the Best Real Estate App of 2020?
Mashvisor’s heatmap tool shows investors where the best markets in a given area are located. Using predictive data, it will point investors to areas with high rental income. (You can actually set filters to find high ROI neighborhoods immediately!)
To evaluate properties of interest, you can use Mashvisor’s investment property calculator to conduct an investment property analysis. The analysis will automatically show you how much rental income a property will earn. It will also help you decide if the investment property has a potential for high cash flow and high cash on cash return and cap rate for both traditional and Airbnb strategies. In addition, Mashvisor’s analysis tells you which rental strategy is best to maximize return on investment. With these tools at your disposal, you’ll be sure to find high ROI rental properties for sale in a matter of minutes.
There are also other ways to maximize income, particularly when renting out the property. These include taking advantage of tax benefits, adding amenities and features to justifiably increase rent, and maintaining high occupancy, which we will discuss later.
Related: How Much Should I Charge for Rent? A 2020 Guide
Reduce Your Rental Property Expenses
Minimizing rental expenses is another useful way to generate good ROI for your property. Be sure to take advantage of tax benefits, such as deductibles and depreciation. Consistent upkeep of your rental property will also prevent major and more costly fixes in the future. Finally, make sure that your financing costs do not hinder your ability to have high cash flow properties. Shop around and get the best rates and even consider refinancing down the line if possible. You can get cost estimates and analyze how rental expenses will ultimately affect your ROI using Mashvisor’s investment property calculator, which also serves as an Airbnb calculator.
Market Your Property Well
Marketing also plays a large role in achieving a high ROI. For starters, it is tied with the number and even the quality of rental applications your property will receive. As we are living in the age of the Internet, consider looking for and listing your property on various rental listing websites. This will give your rental property more exposure than it otherwise would have.
Avoid Tenant Turnover
Our last tactic is to avoid tenant turnover. By reducing turnover and keeping good tenants, you increase the chance of high ROI. Make sure that you and your tenant can properly communicate with each other. Provide incentives for paying rent on time and taking care of the property. To make sure you will have a good tenant in the first place, be sure to carefully screen your tenant. As a part of the screening process, include a credit check, verification of income and employment, rental history, criminal background check, reference check, and eviction history. It is much better to be safe rather than sorry when renting out a rental property.
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