Are Rental Properties A Good Investment? Calculating ROI On Property Investments
If you’re thinking about buying commercial property to rent out, it’s important to understand the cost of your investment compared to the income it will generate. In order to figure out how much money you can make with a multifamily real estate investment, you’ll need to calculate your ROI, or return on investment.
Why ROI Matters When Buying Commercial Property to Rent Out
The ROI tells you how much money or profit is made on an investment as a percentage of the cost of that investment. Essentially, the ROI percentage tells you what percentage of your investment you earn back each year. An annual ROI of 10% means it will take 10 years to earn back 100% of your investment. Use the following steps as a guide for calculating your ROI for current or prospective commercial property investments.
Keep in mind, rates may shift based on many different factors including loan interest rates, market value changes, property tax increases and more.
Step 1: Calculate Your Annual Rental Income
To calculate your annual rental income, add up the total you predict to earn from rent payments over 12 months. Things to take into consideration:
- Will you be charging the same price for each unit, or do some units have additional features that could be worth a premium?
- Can you perform any minor repairs to quickly increase the value of the property that will allow you to charge more for each unit?
- Think about accounting for a couple vacant months for a unit or two in case you’re not 100% full 100% of the time.
Step 2: Calculate Your Annual Rental Expenses
Rental expenses include utilities, renovation costs, property taxes and insurance. Calculate how much you plan to invest over the next 12 months. Things to take into consideration:
- Will utilities be included or will residents pay the utilities? If your tenants will be covering their own utility costs, this shouldn’t be factored into the equation.
- Again, if there’s any repairs done to enhance your property, the expenses of those renovations would factor in here and should be considered to see if it adds more value.
- If you have a mortgage loan on the property, you’ll need to consider mortgage payments and interest rates in this calculation as well.
Step 3: Subtract Your Annual Expenses From Your Annual Income
This part is pretty straight-forward. If you subtract your expenses from your income, you are left with your cash flow, or the amount of money the property is expected to earn that year.
Step 4: Calculate Your Net Income
Add your cash flow amount from step 3 to your calculated equity from step 4 to find your net income.
Step 5: Find Your ROI
Divide your net income by your total investment to get your rental property return on investment.
Learn More About How to Invest in Rental Property
Calculating your ROI seems complicated, but it’s not as hard as it looks. We’re here to guide you on your journey to becoming a successful multifamily rental property investor. Reach out to us if you have any questions about buying commercial property to rent out, and take a look at the commercial property listings available now.
If you’re looking for more resources for calculating the ROI on your multifamily real estate investment, check out this guide for how to calculate your rate of return on a rental property, or read these step-by-step instructions for figuring out ROI on multifamily rental properties.
Learn More About Buying Commercial Properties to Rent Out in Our “Multifamily Basics” Series:
- Part 1: Become A Rental Property Owner 101: Multifamily Properties vs. Single-family Properties
- Part 3: How To Own An Apartment Building: Owning vs. Owning And Operating