Published July 28, 2022. Updated August 17, 2023.
As we pass the midway mark in 2023 and look ahead to 2024, property investors may be thinking about their return on investment (ROI) and what they can expect for the remainder of the year into next year. However, with the many twists and turns that the economic landscape has taken, it's helpful to reassess where you stand.
Our experienced rental property management team is here to provide insight into what you can expect for your rental property as we close out this year and look ahead to the next. We can help you evaluate your ROI to ensure you stay on track for this year and beyond.
So, what should you expect? Here are our expert insights!
Calculating Return on Investment for Rental Property
While there's not a universal ROI that property owners can "expect" for rental properties in 2023, most property managers will tell you that an ROI of 8% is still an excellent goal.
However, the first step in knowing what to expect (in general) for the rest of the year is determining the current ROI for your rental properties. Knowing where you stand now can help you forecast where you'd like to be, along with any changes you need to make to get there.
To calculate ROI, you will first determine the total net profit you get from a property. To determine how much ROI you'll generate from a rental investment, calculate the profit from the annual rent minus costs for utilities, property maintenance expenses, and other costs, including rental property management fees.
Next, deduct the cost of the investment. This includes how much you paid for the property and the amount you invested in upgrading it. For example, if you charge $1,700 monthly for rent, your annual rental income is $20,400. Then, subtract $200 monthly for ongoing operating costs to arrive at a net revenue of $18,000.
If the investment cost was $200,000 (including renovation expenses), your rental return on investment would be 9%.
The actual calculation is: ROI= $18,000 ÷ $200,000 = 0.09
Convert the number to a percentage by multiplying by 100 (or an ROI of 9%).
One Percent Rule
When determining what type of ROI you can expect from a property, there are several factors to consider during the evaluation stage of a new investment. As the best property management Delaware County, offers, we can tell you that the 1% Rule is good for estimating potential returns and ensuring a property can generate an appropriate ROI.
To apply the 1% Rule and consider a property profitable, the monthly gross rental income must be at least 1% of the property's total purchase price.
For example, if you are considering purchasing a property for $200,000, the gross rental income should be $2,000 monthly.
However, this is just an estimate and shouldn't be considered a guarantee of income or the ideal rental rate without considering additional factors. A property manager can help you consider the property's location, economic factors, and other critical information to determine if the property can be successful (and achieve the ROI you need) with a $2,000-per-month rental rate.
Other Factors to Consider
While the 1% Rule is an excellent place to start, other factors go into how much rent you may generate from your property and what influences your return on investment. Working with experienced property managers (like our team here at Rentwell) can help you evaluate these aspects of an investment property's potential success!
Upfront Investment Cost
The upfront investment cost for an investment property is a crucial factor that goes beyond calculating ROI. This initial outlay is not just a one-time expense; it's a determinant of how well the property will fit into your larger investment portfolio.
If the property you're considering has a high upfront cost that doesn't match its ROI potential, it can become a financial burden. Even worse, a single underperforming property can adversely affect the ROI of your entire portfolio, pulling down your overall investment returns.
Therefore, assessing the upfront investment cost is not merely a preliminary step but a vital part of a comprehensive investment strategy.
Location of the Property
The location of a rental property plays a critical role in determining its profitability. The neighborhood can not only influence the rental amount you can charge but also affect vacancy rates and long-term value appreciation.
Some investors diversify their portfolios by acquiring properties in various types of neighborhoods. Others may opt to focus on Class B neighborhoods, which are generally known to provide a stable and consistent return on investment. These areas often strike a balance between affordability for tenants and decent rental income for landlords, making them a popular choice for rental investments.
Whichever strategy you choose, understanding the significance of location can be the key to making savvy investment decisions.
Condition of the Property
Investing in a property that requires substantial repairs or upgrades can significantly impact your returns.
If the initial cost of the property is low but requires extensive renovations that exceed your budget, the investment may not be worthwhile. It's crucial to factor in not just the cost of repairs but also the time it will take to complete them. Waiting for a contractor to finish can delay your ability to generate rental income, further eroding your ROI.
Additionally, renovations can sometimes uncover hidden issues, leading to unforeseen expenses and even more delays. Thus, the condition of the property is a pivotal consideration when calculating its potential profitability. A thorough inspection prior to purchase can offer invaluable insights, helping you make an informed investment decision.
Work with a Delaware County property management company to help you find ideal properties in the right condition and in the best locations to benefit from competitive rental rates and consistent occupancy rates with good tenants. Property managers can also run a rental market analysis to help you generate the best returns in 2023 and beyond!
The Best Property Management Delaware County Offers Helps You Meet Your Investment Goals
Ready to get more out of your rental properties to end 2023 and start 2024 strong? When searching for property managers near me, look for the most experienced property management companies to help you reach your investment goals.
Rentwell has the best local market experience to help property owners in Delaware County and the surrounding areas find excellent rental properties and then manage them to success!
Reach out to learn how our property management services help investors experience optimal ROIs.
