28/01/2024
Smart Investment : What You Need To Know?
Most people invest in real estate to generate income and build wealth over time. One of the main ways to build wealth is with rental properties. However, before buying real estate, knowing how to calculate ROI for a rental property is crucial to ensure it’s a smart investment.
What Is ROI for Rental Property?
ROI stands for return on investment, which in this case, is how much you make from your rental property. It’s important for investors and property management companies to understand how to calculate and maximize profits in a rental property. That said, the ROI for a rental property is the ratio of your net income to the amount of money you invest in the property.
Your net income from a rental investment is the total income you generate from monthly rent payments minus all expenses. Common expenses include property taxes, insurance, maintenance costs, and mortgage payments. Additionally, the amount you invest in a property consists of the down payment, closing costs, and other expenses related to buying the property. Next, we’ll go over calculating your ROI and what makes a good return.
How to Calculate ROI for Rental Property?
One of the easiest ways to calculate the ROI for a rental property is by subtracting your annual operating costs from your yearly income and dividing the total by the mortgage value.
For example, let's say, my Investment Property has the following data:
Mortgage value : RM700,000
Annual Rental : RM90,000
Annual Operating Cost : RM31,500
Net Annual Rental : RM58,500
Then the ROI would be:
RM58,500 divided by RM700,000 = 8.35%
However, there are several ways to determine how much of a return you may receive when investing in real estate.
Cash Flow
One of the easiest ways to calculate the ROI of a rental property is by looking at your cash flow. Cash flow is the amount of cash you have left over after each month from a rental property after paying all the necessary expenses.
Cash Flow = Gross Rental Income – Property Expenses
For instance, say you make RM7,500 each month from your rental. From that, you’d subtract your mortgage payment say, RM3,300, Airbnb Service, Utilities, Premise Repairs, Internet, Housekeeping expenses, totaling RM2,625. Then your cash flow would be RM1,575.
Cash-on-Cash Return
Next, calculating the cash-on-cash return can give you a good idea of how well your investment property will perform. It shows the ratio of annual cash flow to the amount of cash you invested.
Cash-on-Cash Return = Annual Cash Flow / Initial Investment Amount
Once you’ve calculated your monthly cash flow, you can determine your cash-on-cash return. For instance, say you make RM1,575 monthly after all your expenses are paid. In that case, your annual cash flow would be RM18,900. From there, you’ll want to add up your initial cash out of pocket, including the down payment, closing costs, and repair costs.
So, say you spend RM98,500 out of pocket on your investment. Then, to calculate your cash-on-cash return, you would divide RM18,900 / RM98,500 to get a percentage of 19.19%.
If you are looking for an investment property with the above potential return outcome, l can share more details with you.
Do share with your friends on what you have gathered from today's topic.
