The only goal of a real estate investor is to generate the highest ROI. For professionals and people who have a vast knowledge of the real estate ins and outs as well as the know-how of the market, it’s pretty easy. However, for novice and people who are just starting, this can be a tricky thing. Most beginners have no idea which path to take to get to this goal; this is going to be our main topic of discussion in today’s blog.
Here’s a detailed account of what you should do to achieve this hard but worthy goal. By the end of this blog, you will have a clear idea of how to go about achieving the highest ROI on your rental property.
What’s Keeping You From Achieving This Goal?
There are many reasons that can hold you back from achieving your goal of earning a high ROI on your rental property. Here are some factors to consider that may be keeping you from increasing your ROI on rental property.
The three main factors of lower ROI are:
Low Rental Income:
It’s no wonder that the most significant cause of low ROI is earning low rental income. The cash flow suffers a lot when you are earning a low rental income. Did you know that some properties that earn a low rental income eventually become negative cash flow properties, as the maintenance cost, and other expenses, are higher than the revenue coming in?
Here’s an elaborated example to explain this better: Suppose you have a $300,000 apartment. You are charging as low as $200 as your monthly rent. Now with the accumulation of annual expenses that is around $1000, your ROI should be:
ROI = Annual Returns ÷ Cost of Investment
ROI = [($200 x 2 units x 12 months) – $1,000] ÷ $300,000 = 1.3%
Now because you are charging low, your high-end apartment is generating a low annual rate of return.
Low income is the obvious culprit, but there is also a black sheep in disguise. That black sheep is the expenses that get out of hand. The most common mistake that a landlord or an investor makes is misjudging the costs or paying too much in expense cost. To avoid this, you will need to review and revise your expense and reduce them to a comfortable level—reduction where ever possible will help you save a ton of cash. Also, nipping maintenance issues in the bud will keep you from paying a considerable amount after the problem gets out of hand.
Let’s again review the example given above with the current scenarios of high expenses.
Your rental rate per unit is $500, but now your expense is higher, around $5000 annually. Let’s calculate the ROI now.
ROI = [($500 x 2 units x 12 months) – $5,000] ÷ $300,000 = 2.3%
Even with a higher income rate, the ROI is still suffering due to the higher expense cost.
Cost Of Property:
Buying smart can help you increase your ROI rate. If you buy an expensive property but charge the same old lower rate, the ROI will drop. Check out the example below to understand the calculations.
Price of the unit: $60,000
Rental income: $500/unit.
Expenses: $1000 annually
ROI = [($500 x 2 units x 12 months) – $1,000] ÷ $600,000 = 1.83%
See how the ROI dropped even lower; this is what happens when you buy an expensive property.
Tips To Increase Your ROI Rate:
If you have carefully read the scenarios mentioned above, you will know that the best way to change the game is to do the opposite of the scenarios above. We understand that it’s easy to and hard to do, but there is no hassle in at least applying the given tips to increase the ROI. A bit of smartness and a lot of effort will help you achieve your goals.
Buy Economic Properties:
The easiest way to increase your ROI rate is to invest in more economical properties. It’s pretty evident that the investment on property plays a huge role in making or breaking the ROI rate. Fortunately, this isn’t a hard step at all. The market is full to brim with affordable properties that will reap you a better ROI than the massively expensive ones will. Set your budget, and use a filter on Mashvisor’s to score your kind of property. This online tool helps you search and analyze affordable properties that are bound to reap better fruits. You can also take advantage of the heatmap, to check out the most affordable neighborhoods, and that will reap you a higher ROI on your investment. The tool is free to you; don’t hesitate to search the internet for it as it’s highly recommended.
Maximizing the Rental Income:
Many people believe that a well-maintained property will earn more rental income, but trust us, this isn’t the case. Yes, a well-maintained property matters, but that’s not all it takes to generate a high rental income.
You will need to make a thorough neighborhood analysis, check out the neighborhood that charges higher than others. Search for the list of 50 best cities for rental income online and see if that helps your research.
Once you have the right neighborhood in your list, you will need to analyze every property individually to know what makes them tick. The easiest way to do this analysis error-free is to use tools like Mashvisor. This tool lets you conduct the area analysis as well as the analysis of your selected investment property. This will help you find the best property that will surely reap you better rental income.
Rental Property Expenses:
Lower your expense = better profit, always remember this rule and start cutting down on expenses. Keep a tight schedule of inspection and maintain this before they get out of hand. If you are stuck and need to get something big fixed, make sure you check out the lowest rate in the market and pay as low as possible.
There are many small steps that one can take to increase the ROI rate, all you need is a bit of proactive steps and a lot of effort.