Every experienced and beginner real estate investor enters the real estate investing world with one goal in mind: TO MAKE A PROFIT! There is no doubt that real estate investing is very lucrative but only when you’re getting the best possible return on investment. Investing in real estate can generate more profits than any other industry. However, due to the high number of buyers and shortage of homes for sale, it can be hard to get the best return on investment even for the most experienced investors.
There are ways to maximize your return on investment and greatly increase your chances of success. The first thing you need to be aware of is ROI and how it is calculated.
What is a return on investment?
The rate of return on investment for your rental property is the amount of profit you receive from your property over a period of time. It is calculated and presented in a form of a percentage. You always want to aim for a high return on investment when searching for a rental property to purchase.
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How to calculate ROI
In order to calculate your return on investment, you need to know the profit or loss generated by your rental property and the total amount of money you invested. Here is what the ROI formula looks like:
ROI = Net Operating Income / Cost of Investment x 100
The above formula looks simple and easy to use. However, you need to take into consideration a number of different variables. You need to include expenses such as repair/maintenance expenses, tax fees and the amount of money borrowed (with interest). Also, take into consideration your financing method. For example, did you use a mortgage loan to finance your rental property?
After you calculate your net operating income, you divide it by the total amount of cash invested and multiply it by 100 to get your ROI percentage.
Before you begin your search for investment options that offer a high return on investment, you need to consider how much risk you’re willing to take on. The best real estate investments for generating a high return on investment also carry the highest risks. It involves a lot of work to manage a rental property and keep up with tenants. However, if you follow these tips, you can boost your return on investment in no time.
Tips for maximizing the ROI for your rental property
1. Make sure your property is rent ready
The first step to maximizing your return on investment for your rental property is by making it rent ready before marketing the property. Make sure that the entire interior is ready and clean. Check to make sure there is fresh paint, clean carpets and appliances and everything works in order and all necessary repairs and maintenance are finished. Having your investment property rent ready will shorten the time it takes to lease the property and boost your ROI.
2. Market your property well
How you market your rental property determines the number and potentially the quality of applications you receive for your property. There is a number of marketing strategies you can use to increase exposure and get more tenants. Look for different real estate investing websites and list your property on more than one website. The internet is the first place tenants search for properties so be sure to strategically market online.
Depending on the location and type of rental property you own, you can also target a specific group of tenants that may be likely to rent out your property such as university students if your property is near schools or employees if your property is near businesses.
3. Carefully screen your tenants
Choosing qualified tenants to rent out your rental property is vital to maximizing the ROI of your rental. Having an unqualified tenant can cause problems and can be one of the most draining mistakes financially any property owner can make. That is why you need to carefully screen your tenants. In your screening process, include a credit check, verification of income and employment, rental history, criminal check, reference check and eviction history. It’s better to be safe than sorry especially when renting out your property.
4. Conduct regular inspections
A commonly made mistake among many property owners is that they only inspect their rental property at move in and move out. This is wrong because it can lead to higher repair and maintenance costs. You need to have regular inspections to ensure that your property is well kept. When you check your property every now and then, you lower your repair expenses and boost your return on investment. Plus tenants are happier when the property is in good condition.
5. Avoid tenant turnover
When you reduce tenant turnover and keep good tenants, this will increase your return on investment in the long run. Make sure you have a good communication system with your tenants. Provide incentives for things such as paying the rent on time and caring for the rental property. Having a vacant property is the worst thing that could ever happen to property owners, so do your best to avoid tenant turnover.
6. Collect rent on time
Your tenant should clearly have an idea about your plans to enforce the terms of your lease. Communicate and talk to them about when rent is due, how the rent should be paid, and the process for late rent. Make it clear to them what your expectations are and what will happen if they aren’t paying on time. The last thing you want is to have a non-paying tenant at your property. This will not only lower your return on investment but will put you in a very stressful situation.
7. Reduce maintenance costs
Take the time to choose the best maintenance vendors and contractors. You don’t want to select randomly. Do your homework correctly and search for a group of people who can work with you. This is important because having high maintenance costs can drastically lower your return on investment. So for example, if you find yourself with a tenant complaining that the air conditioning isn’t working, having an HVAC contractor on hand is helpful.
The bottom line
Investing in real estate can be a very profitable career choice. There are so many different types of residential properties you can choose from that offer a high return on investment. Don’t wait for tomorrow and begin today securing your future financially.
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