Getting the Best ROI from Your Investment Property
When you own an investment property, it’s exactly that. It’s an INVESTMENT. Whether you hold onto it and rent it out or fix it up and flip it as quickly as possible, you have to aim for getting the best return on investment (ROI).
Determining a Target ROI
First, you must determine your target ROI. This may vary from investor to investor. In most cases, the target ROI will be a range of profitability that makes the real estate investment worthwhile to you. Of course, you want to make as much profit as you can. The high end of your target ROI range may be limitless. However, it’s the low end that you have to focus on the most. What is the lowest amount of profit you are willing to accept to put in the time, money and effort it will take to get a positive net return out of the property?
Let’s just say your target ROI is somewhere in the $40,000 to $100,000 range for a fix and flip investment. Now, you have to crunch the numbers on any property you are considering purchasing. You are able to buy a house for $200,000 cash and your market analysis shows it should be worth $320,000 on the open market after it is properly renovated. This means you wouldn’t want to spend more than $80,000 on the repairs and upgrades. Otherwise, you are going beyond the low end of your target ROI and it’s probably not a wise investment.
Rental Property ROI Calculations
An investor purchasing a rental property will have different calculations to make because the profits will come more slowly as you get paid rent from month to month and you eventually gain equity in the home. You have to factor out your ownership expenses over a longer period of time and determine your target ROI based on what you want your monthly and annual profits to be. This will also help you set your rent price.
Basically, a rental property owner will need to calculate his or her average monthly ownership expenses and then set a monthly rent price that gives them a desired level of profitability over the time they intend to own the house. You can factor in inflation and rent prices going up over time, but usually your ownership expenses are going up concurrently. If the rent price you need to set is not realistic for the market that the rental property is in, then it’s probably not a good investment. The property is no good as a rental if you can’t find tenants!
Stay tuned to the PropertyLark Blog as we get deeper into the topic of ROI and more specific calculations that you can use to determine your target ROI and the ROI potential of any single-family home you are looking at as an investment. We use our own proprietary analytics software and systems to identify properties with great investment potential. Then, we send these exclusive deals to the buyers in our network. Still, the buyers will want to crunch their own numbers before buying any investment properties.
Add Up the Expenses
It all comes down to doing the math. You want to compare your projected ownership costs against the projected income you can earn from the property in a sale or rental situation. Make sure and factor in everything.
- Purchase Price
- Property Taxes
- Construction/Renovation Costs
- HOA Dues/Mello Roos/Assessments (if applicable)
- Agent/Broker Commission (if ultimately selling the property through a Realtor®)
- Repairs and Maintenance*
*The last couple items on this list apply primarily to rental property owners who will have additional ongoing ownership expenses. The others would apply to anyone for as long as they own the property.
For a flipper, it’s all about how much the property will realistically sell for once the renovation is completed (minus any selling expenses and fees, of course). For a rental property owner, it’s a matter of rent prices. You will want to factor in any projected rent increases and equity growth for as long as you plan to own the unit.
Be Conservative in Your Estimates
Even when you crunch the numbers down to every nut and bolt, it’s usually a good idea to tack at least another 10% onto your total ownership and renovation expenses. This will help account for unforeseen issues that inevitably come up. Likewise, you can be very conservative in your resale price or rental income estimates. Never assume you will get top dollar. Playing it safer will give you an extra buffer to help make sure you reach your target ROI.
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