Jumping into the rental industry can feel like you’re going where there are no rules. Without clear guidance about what is and what is not a good investment, it can be overwhelming trying to determine which properties will do well for your business.
This is where the rental property ROI calculator is a stress-reducer for both new and experienced landlords alike. Using this type of ROI calculator, you can get a clear picture of what your investment will be and what type of return you can expect.
This is key for monitoring and growing your business. So, if you aren’t already using ROIs as part of your rental property management, it’s time to make some changes. Discover everything landlords should know about calculating ROIs in today’s RentPrep guide.
Table Of Contents: Investment Property ROI Calculator
Adopting an ROI calculator for your needs is crucial for growing as an investment property manager, and you must understand why this is so important. Learn all that you need to know about ROI and how to calculate this data today:
- What Is Rental ROI And Why Does It Matter?
- How To Calculate ROI On A Rental Property
- Make The Formula Your Own
- Investment Property ROI Calculator FAQs
- Ready To Use A Rental ROI Calculator?
What Is Rental ROI, And Why Does It Matter?
ROI stands for return on investment. ROI is a number that helps landlords and investment holders determine the profitability gained from their original investment. In simpler terms, ROI tells you how much money you have made off of your initial investment and how much that investment is scaling.
Managing rental properties doesn’t automatically mean that you’re generating large amounts of cash flow. In fact, your investments could lead to profits or losses. While the goal is always to make money by earning more than you spend on expenses, what is happening with your finances isn’t always obvious.
ROI lets you know just how much profit you are making and how that profit changes over time. By calculating ROI regularly, you can compare monthly ROI or annual ROI to get a better picture of your business and its performance.
The Importance Of Calculating ROI
When you’re setting rent for a property, you might not be thinking about your investment or the large-scale picture of your business. By quickly calculating ROI based on that rent amount, however, you can start to get an estimate of what the return on your original investment is going to look like.
Landlords find ROI useful for many different purposes:
- Identifying if any positive return is happening and where it’s being seen
- Determining which properties to invest in
- Finding out if any properties are underperforming compared to expectations
- Comparing year-to-year or month-to-month growth for business planning
- Deciding if further investments should be made into certain properties
Learning how to calculate ROI for rental properties is essential. Without this comparative statistic, it can be difficult to become the best investment property owner that you could be.
Remember, rather than a strict financial tracker, ROI is best used as a tool of comparison. Comparing your properties, comparing your expectations to reality, and comparing your year-to-year growth can all be benefitted from the use of ROI.
How To Calculate ROI On A Rental Property
It’s time to learn how to calculate return on investment for rental properties. ROI will help you analyze your business, and you can even expand ROI to calculate your annual yield once you understand this basic calculation.
Choosing rental property relies on this formula, so it’s time to learn how to calculate ROI correctly. At the base level, ROI is nothing more than comparing your net profits to your overall investment. Let’s break down what that means.
The Formula
The basic formula goes like this: Divide your net investment gain by the cost of investment and multiply this number by 100 to get your ROI percentage.
Your net investment gain is the amount you have taken in minus the amount you have spent.
What To Include In “Gain” And “Cost”
What exactly should be included in your ROI calculation when considering investment cost and investment gain?
The precise way you define these parameters may differ from other landlords, and that’s okay. However, there are some things that most experienced landlords and business owners choose to include.
For the cost of investment, you will want to consider all expenses that are part of the total cost, including:
- Purchase price
- Downpayment
- Mortgage interest
- Property tax
- Insurance
- Operating expenses, such as property management costs or repairs
Gains on investment, on the other hand, should include the following as a starting point:
- Monthly rent
- Property appreciation
- Additional income (i.e., parking fees, etc.)
When you’re working on a financed property, don’t forget to include mortgage payments, interest, and other applicable details in your calculations, as these can make a big difference in the final results of your ROI.
Once you have ROI numbers for your properties, you can compare them to each other, to other properties, and to different periods. These comparisons will make it easier to understand what is happening in your business, where you are seeing growth, and where it’s time to make changes.
Make The Formula Your Own
While following the general guidelines for ROI is important for an accurate comparison, you know your business better than anyone else. Include those numbers if you know that certain costs are part of your investment, even those that many landlords may not think about.
ROI is not a number used for official business or filing taxes. Instead, it’s a comparative figure that you will use to monitor and grow your business. Make it your own. Adapt ROI, and all related financial calculations to fit the needs of your business.
It’s up to you to manage your business, and that process includes deciding how and when to use ROI. Landlords use this data in various ways, and you can find the way that works best for your business. We’ve given you this valuable tool; it’s your turn to make it work for you.
Beyond A Rental Property Calculator
Once you’ve nailed down your ROI, you’ll be able to refine your rental pricing and ensure that you are bringing the right tenants into your properties at that price point. However, it might be a significant change from what you were previously doing, which could leave you feeling overwhelmed by the screening process.
Instead of struggling, consider if getting help with tenant screening would improve your business.
Here at RentPrep, we have created a highly refined process for tenant screening and we’re happy to share it with you. Our tenant screening packages range in price to fit your needs, and they include a variety of services, from credit reports to credit and background checks. Whatever you need, we’re ready to help you with our qualified screeners today.
Investment Property ROI Calculator FAQs
Looking for more information on a rental property’s return on investment? We’ve answered a few of your top questions below.
How do you calculate if a rental property is worth it?
The best way to calculate whether a rental property you are considering purchasing is worth the investment is to do a mock-up ROI calculation.
Gather what you know about the property:
- How much does it cost?
- What will it cost to get it to rentable condition?
- Will you need to finance the purchase?
- How much rent can be charged?
- Will there be high vacancy or turnover rates?
By gathering this information, you can calculate an estimated ROI to determine if the property will be a good investment or not. Ultimately, it is up to you to decide what is and what is not worth the investment, but having this information and ROI calculation available can make the process easier.
What is a good ROI on a rental property?
You can determine what a good ROI is in several ways. Your location, business style, time investment, property value, and many other factors are going to play significant roles in what ROI looks like.
However, most investment property owners aim to have more than 5% ROI for all of their properties. Properties with lower than a 5% return will take a long time to provide any real financial growth, and ROI is likely to decrease over time. Other types of investment would be just as valuable for less work when ROI goes below 5%.
ROI greater than 10% is a sign of a good deal on an investment property or a property that is very well managed and performing well for your business. Most investment property owners see ROI between 5 and 10%. This is reasonable and to be expected.
What are the 1% and 2% rules?
The 1% and 2% rules are guidelines often used by real estate investors to get an idea of whether or not they should purchase or retain an investment property. These numbers can be useful to investors and landlords as they analyze and grow their business, as they set easy-to-judge limits on what is and what is not effective.
The 1% rule says that the monthly rent of a property should be more than or equal to 1% of the total purchase price. Multiply the monthly rent of the property by 100—is this number greater than the purchase price and any needed repairs? If so, it’s probably a good investment choice or a property that is performing well.
This test is intended to be quick and easy. It doesn’t account for all the specifics but instead gives investors an accessible “yes or no” on looking further into a property’s potential.
Another iteration of this same concept is the 2% rule. In this case, you would want to ensure that the property’s monthly rent would be higher than 2% of the maximum purchase price. This guideline is less commonly used in the rental industry, as most investment professionals find it unbalanced.
When should I use an ROI calculation?
To get the most out of ROI calculations, you want to implement them at multiple points in your business management:
- Monthly: ROI can be a great way to get a snapshot of your business.
- Annually: Overall annual ROI will help you get a more comprehensive look back at the past year and how it went for your business.
- When purchasing property: Estimating ROI on a potential investment property will ensure that you make business-savvy investments.
- When selling property: Calculating ROI to share with potential buyers or investors is a great way to market your rental properties when selling.
There are many other times when you may find ROI useful, and that is why it is a great idea to keep an ROI calculator on hand. Having a document where you can quickly enter relevant numbers to generate ROI may help you get a better grasp on growing your business. Evaluate where ROI can improve your process and include it as part of your management routine moving forward.
Ready To Use A Rental ROI Calculator?
It’s time to take hold of your properties’ profitability and make strides in your business management. Everything you know about ROI will help your business find future success and point out properties that need more investment to succeed. Without ROI, you might not realize it’s time to try increasing your rental property’s value in order to increase returns.
Remember, keeping an eye on ROI has a lot of benefits:
- Identifying which properties are strongest in your portfolio
- Choosing new rental properties to invest in
- Showing the potential of your properties when selling
- Assessing and improving underperforming properties
There’s no way to be certain that your property will either fail or perform in the future, but you can track how it’s doing right now with a rental property ROI calculator. Don’t leave this fantastic tool out of your management arsenal.