As an experienced Barrier Islands property management company, we know all too well the return on investment (ROI) is a critical key to managing the success of your rental properties. However, depending on if you paid cash-in-full for your investment or you financed it with a mortgage, the ROI formula changes. 

We've already talked about calculating the return for a cash transaction. In this blog post, we will go over calculating the return on a financed investment property. This has been one of the most commonly asked questions by real estate investors, so we're happy to provide some answers!

Financing a Rental Property Is Common

If you're thinking, "should I only invest in a property if I can pay cash," rest assuredmany investors finance investment properties as part of their long-term wealth strategies! While paying cash outright for a property is an excellent way to maximize returns, financing a rental property is common and a completely acceptable way to build a real estate investment portfolio.

Tranquil swimming pool.

However, when financing a rental, investors must understand what it takes to optimize ROIs. A mortgage payment is a significant ongoing expense. It's important to factor that into your costs vs. income comparisons when evaluating returns. 

The Return On Investment Formula for Financed Transactions

The Barrier Islands, Fl rental market offers higher-end Class A properties that can be an excellent addition to a real estate investment portfolio. For this ROI formula, you purchased an investment with a sale price of $800,000.

Start with the Down Payment and Real Estate Closing Costs

One of your first expenses when financing a property is the downpayment. In other Florida Gulf Coast areas, home prices will range lower or higher than in Barrier Islands. Depending on the cost of your investment property, investors can experience lower down payments to purchase quality rentals. At 20% of the sale price for this example, you put down $160,000. 

With a mortgage, closing costs are often higher than with a cash transaction. For this calculation, closing costs are 4% of the sale price, which adds another $32,000 in expenses to factor into the formula. 

Add Investment Property Remodeling Costs

Most rentals require maintenance and renovations before they're ready for the market. For this rental, you spend $45,000 on renovations to attract quality tenants. 

At this point, your total out-of-pocket costs for a new rental are $237,000. Your mortgage amount is the sales price of the home ($800,000) minus your down payment amount ($160,000), which leaves you with an investment property loan of $640,000.

Understand the Monthly Mortgage Payment

Your monthly mortgage payment includes more than the principal amount. If you took out a 30-year fixed-rate loan with an interest rate of 4%, your monthly mortgage payments would be $1,848 (including principal and interest). 

Don't Forget Other Expenses

Taxes, insurance premiums, utilities, property management fees, and other ongoing costs must be part of your formula to analyze the return on investment. This adds another $2,000 to your monthly expenses, bringing your total monthly out-of-pocket costs to $3,848 (or $46,176 annually). 

Calculator with the word ROI

Add Monthly Rental Income (then Run the Formula)

You've set the monthly rent amount for this rental at $6,500 or $78,000 annually. Your annual net return is $78,000 minus your monthly expenses of $46,176 ($31,824). Now you're ready to run the formula for ROI!

  • Divide the annual net return ($31,824) by your original out-of-pocket costs for the down payment, closing costs, and renovations ($237,000). This number is .134.
  • Multiply that number by 100 to see your ROI as a profitability ratio (13.4%).

While that can seem like a lot of detail, numbers, and equations, it's all critical to monitoring the performance of a rental property in Barrier Islands or other nearby areas. Investors have a wide range of investment property options that fit a budget for initial costs (like the downpayment) and estimated rent amounts that target your ideal renters. 

ROI formulas don't change, no matter how much you put down or borrow on a Florida rental. Choose a property, expert rental management, and apply the best strategies to maximize ROIs for any rental in the Gulf Coast area. While maintaining consistent cash flow is essential, ROI is a critical metric to analyze income compared to your out-of-pocket expenses. Use this knowledge and work with a Barrier Islands Florida property management company to reduce costs, improve efficiencies, and boost renewal rates to optimize returns and get more out of your investments!

Expert Property Management Helps Investors Maximize Returns

The ROI of a financed transaction is different than that of a cash purchase. To calculate the return on Florida rental properties, investors need to know how much rent revenue and mortgage payments are coming in versus how much interest is paid for the loan. With a good handle on your returns, investors can put strategies in place to improve them!

If this sounds complicated or overwhelming, don’t worry! Gulf Coast Property Management can help you optimize your rental property investments so that you can get back as many pennies as possible out of every dollar invested. Give us a call today, and let's talk!

Learn more about ROIs when you use our free Rental Property ROI Calculator!

Calculate Your ROI

Subscribe to our Blog

Categories