ROI, or “return on investment,” measures the amount of money you make on an investment in relation to the amount you initially invested. When investing in real estate, your objective should be to maximize ROI; when you are purchasing a property, all of your actions should be based on achieving the desired return. (For your convenience, here is a glossary of rental property investment terms.)
How can you calculate your potential return on investment and maximize those returns for your property in 2023?
Calculating ROI for a rental property
The key to successful real estate investing is to understand the numbers. Before you purchase the property, the rental’s potential for profit is assessed. If the math is incorrect at the outset, there is little you can do to improve the rental’s performance later on.
The following should be factored into your calculations when buying a property:
- The 10% rule (aka 1%): To calculate this, divide the property’s annual income by the cost of the purchase. The property must receive a response of 10% or above to be considered a wise investment.
- The potential rental income: Looking at the rental rates for comparable homes in the neighborhood is the best way to determine the rental income. You want to watch the rental rate rising in addition to knowing the rental rate.
- Repairs and maintenance: What must be done to make the house rent-ready? If you do them, can you raise the rent? Renovations that prevent you from raising the rent should be carefully considered. What amount should you budget each month for maintenance?
- Property management fees: You don’t pay if the house is empty. Property managers charge 8–12% of the monthly income. They manage maintenance requests and tenant screening. You can purchase property in remote areas with the help of a property manager.
- Taxes and tax deductions: If the local tax rate is excessive, your entire profit could be lost. Before you purchase the home, be aware of your tax obligations.
- Vacancies: You will still be required to pay the bank even if there are no tenants living in the rental and you have a mortgage on the home. When making your calculations, account for vacancies.
- Monthly expenses: These include mortgage payments and interest, insurance, HOA fees, utilities, etc.
How to maximize investment rental property returns in 2023
Lowering costs and raising income are the simplest ways to increase ROI from a rental. You may accomplish this in one of two ways: by improving the rental’s appearance or by managing it more effectively. To do both is ideal.
Here are ten suggestions on how you can maximize ROI on your rental property:
- Repaint the home
You don’t paint the walls a new color solely to boost your return on investment. A beautiful coat of paint is the most fundamental component of your rental curb appeal.
- Improve the exterior
The most crucial elements of your home’s exterior include the front entryway, the landscaping, and the exterior lighting. You can attract the best renters by updating them.
- Expanded storage
The majority of rental homes have far too little storage. By providing your tenants with a number of options for storing their items, you can make your home stand out. Ample kitchen storage is a major deciding factor for some renters.
- Upgrade appliances
Depending on the kind of tenants you are hoping to attract, you may or may not need top-of-the-line appliances for the rental. If this is an expensive rental, putting inexpensive equipment will only serve to lower its value. The opposite is also true.
- Expand your listing
It matters where you market the rental. The first step is just getting it listed with a multiple listing service (MLS). Create a website for your rental property to increase its value. Use social media to reach a wider audience and offer a virtual home tour.
- Use professional photos and videos
If you research your competition, you’ll find that many listings use images taken using a smartphone, and many do not include videos. You’ll want to take things a step further by hiring an expert photographer to capture high-quality photos and consider having a walkthrough video made.
- Hire a professional copywriter
It’s best not to simply list the property’s features and leave it at that. Instead, you want to stand out from the competition with compelling material that entices potential tenants to see the property.
- Talk about the neighborhood
More significant than the actual property itself is the neighborhood in which a rental is situated. Renters are more likely to choose an average property in a desirable area than a superb home in a less desirable area.
- Stage the property
When trying to sell a home, staging is a frequent strategy. Few real estate investors know that staging is still useful when renting a home. Prospective tenants will feel at home in the property when it has been staged.
- Improve tenant screening
The amount of time and attention you put into tenant screening will determine whether you find tenants who can afford the rent, pay the rent on time, and take care of the property. Generally speaking, the higher the rent a tenant is prepared to pay, the more probable it is that they will take good care of your property.
Planning for the next year will get you ahead of the rental game. These ten simple tips will be a surefire way to increase your property’s return on investment in 2023.
We are pledged to the letter and spirit of U.S. policy for the achievement of equal housing opportunity throughout the Nation. See Equal Housing Opportunity Statement for more information.