Becoming a DIY property manager takes a significant investment of time, energy, and money. No matter what your goals as a landlord may be, you expect to have a good rental property ROI or return on investment. Whether you’re looking to save up for retirement, fund an exciting vacation, or put a kid through college, your property’s will have a significant impact on your life.
When you’re managing your property, you need to know how much money you’re actually making. Of course, figuring out how profitable your rental is can be more complicated than you think. At Rent Portland Homes by Darla Andrew, we have years of experience in making rental properties lucrative. Here’s our guide to figuring out exactly how much money your property is making you (and how it could make you more).
What is an ROI?
Tracking your ROI is the best way to determine whether or not your rental is turning a profit. Put simply, ROI is the amount of money you make on a property as a percentage of the cost of that investment.
To calculate your ROI, you need a detailed accounting of all the money you’ve earned or spent on your rental. Good bookkeeping is key to being a successful property manager, so during the year, be sure to note all the maintenance costs, taxes, and miscellaneous expenses your property racks up. Equally important is keeping track of how much you’re making from rent, especially if you have multiple properties or periods where your units are vacant.
Knowing your ROI is useful for various reasons. The most important is finding out whether your investment is making enough money. If you’re investing so much to maintain your property that it eats away at your profit margins, it may be time to look at other options.
The Rental Property ROI Formula
Calculating the ROI on a rental property can be tricky. The result depends on which factors you include in your calculations. Simply put, your ROI is the cost of your property subtracted from the amount of money you’ve made (gain). You then divide that number by the total cost of the investment and then multiply that number by 100 to translate it into a percentage.
For example, let’s say that, back in grade school, you purchased a candy bar from the convenience store for two dollars and sold it on the playground for three dollars. To calculate the return on that investment, you would subtract two from three and then divide that number by two. The result is that you made a 50 percent profit; not too bad. But what if you take a bite of the candy bar before trying to sell it? What if you wait long enough that the expiration date passes? What if you buy the candy bar during post-Halloween clearance sales, and the price of candy increases before you try to sell it again?
In unsweetened terms, these other factors could be maintenance costs, gaps between renters when you’re not making any money, changing property value, taxes, and more.
Calculating Your Rental Property ROI
If you purchase a property in cash, calculating your yearly ROI is more straightforward. Start by adding up your total investment cost: what you paid for the property, plus closing costs and the price of any remodels you completed to start. Then, separately calculate the past year’s expenses you’ve sunk into the rental. Now you have your total investment cost and your annual expenses.
Now, add up all the money you made over the year from rent to find your yearly earnings. Once you have those three numbers, it’s time to input them into the formula. Take your expenses and subtract them from your earnings. This is your annual return.
Lastly, to find your ROI, take that annual return, divide it by your total investment cost, and then multiply that number by 100. This percentage is your ROI.
If you took a mortgage out on your property, you’ll need to start with the closing costs plus the down payment as your total investment cost. When it comes to your yearly expenses, make sure to include your monthly mortgage payment in calculating what you’re spending. From there, the process is the same; subtract your expenses from your profits, and divide it by your total investment cost.
Once you’ve calculated your ROI, it’s easy to see whether you’re getting your money’s worth. A general rule of thumb is that an ROI of over 8 percent is decent, but ideally you should aim for more than 10 percent. Anything less than 5 percent means your rental investment is struggling.
A Property Manager Can Maximize Your Profits
Being a profitable landlord requires diligence, patience, and a willingness to do a fair amount of math. If you find out that your costs exceed your ROI, you may need to decide whether to ride out the rough patch or sell your property. You may want to consult a financial advisor to minimize expenses and maximize earnings — or you might consider signing on with a professional property management company.
Many DIY landlords might think that a property management company would hurt their ROI. However, Rent Portland Homes by Darla Andrew can help you boost your investment. We ensure that you’re making as much profit as possible by ensuring your properties charge up to market rent. Many property managers end up over-charging for their units and driving potential renters away, or under-charging and losing out on a large percentage of their potential earnings. Hitting the sweet spot of perfectly-priced rent involves large amounts of research and a familiarity with the market honed over years of work. With our long experience, we put in the work for you to ensure that your properties are operating at peak efficiency.
On top of optimizing the rent, we at Rent Portland Homes by Darla Andrew also handle finding you the best tenants. One crucial way to maximize your returns is by ensuring that your unit doesn’t sit vacant because your tenants broke the lease. We also keep your rental well-maintained so you can keep rents competitive without worrying about a costly emergency maintenance charge. All in all, we streamline your investment to keep your ROI at peak performance. If you’re interested in seeing what we can do to help boost your profits, call or text at (503) 515-3170 any time or reach out through our website’s contact form. We’re here to help your investment shine!