How much money are you making from your rental properties? This is a question that many property owners ask themselves when they're wondering how to calculate ROI or evaluate the success of investment properties and portfolios. 

If the answer is "not enough," then it's time to do some math! Today, our Sarasota property management team will go over the calculations and show you why they're important for understanding ROI on rentals!

What Is ROI (Return On Investment)?

For a property owner, the return on investment is how much they earn from their rental properties over time. It's most often represented as a percentage. It helps them evaluate their investment and decide if meeting their financial goalsor falling short. When a rental isn't generating the ROI you need, it's time to diagnose what's wrong and apply strategies to improve it!

Are Your Investment Dollars Working Effectively?

When considering a new rental, knowing the ROI allows investors to assess whether putting money into a particular property is a wise choice or not. After buying a new rental, finding a tenant, and collecting the rent, ROI helps investors monitor financial progress based on returns. 

Sarasota property managers use best practices to calculate ROI based on various factors, including income and expenses. 

Finance

How Should Investors Calculate ROI?

Successful investors routinely keep an eye on a property's return on investment. If you have multiple rentals in a real estate investment portfolio, it's critical to monitor the individual ROIs for each property and the portfolio as a whole. 

When Purchasing Cash-Only Properties

Some investors can pay cash for the full sale price of a new property. It's an excellent way to minimize long-term financing costs and improve ROIs from the start! 

To calculate the annual ROI for one cash-only property, divide the annual revenue by the purchase price of the rental. 

  • Let's say you paid $125,000 for the property, including closings costs and all fees. 
  • You spend $10,000 on renovations. The total start-up cost for the property is now $135,000.
  • With the monthly rent amount at $1,500, you'll generate $18,000 in rental income over twelve months. 
  • Dividing $18,000 by the initial price of $135,000 gives you an ROI of .133 (or 13%). 

Did we leave out a few expenses that can impact your ROI? Don't worry! We'll talk more about other ongoing expenses that should be factored into your ROI calculation. 

When Financing a Property

While paying cash for an investment is ideal, it's common for investors to get a mortgage when buying a new rental property. If you're financing a property, then the ROI calculation is slightly more complicated. 

Investors must factor in interest rates, take out the out-of-pocket down payment amount, and calculate ROI based on monthly mortgage payments and rental income. There's nothing wrong with taking out a mortgage to finance a Sarasota Fl investment property. However, it's critical to adjust your expenses to include fees, principal and interest, and an escrow amount if it's part of your mortgage. 

What Else Influences ROI? 

What about those "other" expenses we should consider in your calculations? When reviewing income vs. costs to determine ROI, make sure you include:

  • Property management fees
  • Insurance costs
  • Maintenance expenses
  • Property taxes
  • HOA fees
  • Utilities that a tenant doesn't cover

If the ROI isn't where you'd like it to be, don't give up! Operating a residential property in a way to optimize ROIs isn't easy, but there are things you can do to improve your bottom line!

Cropped view of businessman in formal wear using calculator and writing in contract near house model

Work With a Property Manager to Optimize ROI

Focusing on "profit" can often leave investors with an inaccurate picture of a rental's performance. That's why ROI is such an important metric to use as a routine part of your financial analysis. 

If you're not sure how to understand ROI and how it connects to your long-term investment income plans, a property manager in Sarasota can help! We handle the calculations for you and deliver financial reports to help you understand and monitor the progress of each rental in your real estate investment portfolio

We Apply the Best ROI Strategies

Never lose hope at the first signs of a low ROI! With a property manager, investors can apply the best strategies to turn an ROI around. Before you invest in a new rental, a property manager can also run the numbers for you to make sure your investment dollars are going to a worthwhile rental.

A Property Management Company Analyzes and Boost ROI!

No two properties are alike, but the best industry insights and local experience from rental management experts can help every rental home in your portfolio generate the ROIs you need!

Gulf Coast Property Management is here to help you understand and improve ROI on your investment property. We know that it can be challenging for investors, especially new ones, to calculate their return-on-investment in a way that makes sense. Reach out today to talk with one of our experts that can answer any questions you may have about calculating your rental income ROI, managing tenants, raising rents (or lowering them), and more! 

Use our free interactive tool! Find your ROI with our free Rental Property ROI Calculator. Calculate Your ROI

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