When you buy a rental property, you do so with one goal in mind: to generate a positive return on investment (ROI).
So, What Is a Good ROI on Rental Property?
A good ROI on rental property typically ranges from 6% to 10%, although this can vary with location, property type, and market conditions. In some areas, ROIs over 12% are possible, while in expensive urban locations, a 4% to 6% ROI may still be favorable.
Now, let’s examine the finer points associated with rental property ROI.
How ROI on Rental Property Is Calculated
ROI on rental property is calculated by dividing annual rental income by the total investment cost, providing a percentage that reflects the property’s profitability. This percentage provides a clear understanding of how profitable your property is (or isn’t).
Here’s an example to illustrate how ROI is calculated for rental property. Suppose you’ve purchased a rental property for a total investment of $200,000, including the purchase price and renovations. In a year, you earn $18,000 in rental income from your property.
To calculate the ROI, divide the annual rental income ($18,000) by your total investment cost ($200,000). This calculation gives you 0.09, or 9%, which is the ROI.
Factors Impacting ROI on Rental Property
There’s no shortage of factors impacting ROI in rental property. Here are the most important ones to consider:
- Location: The geographical area where the property is located greatly impacts its rental demand, property values, and potential rental income.
- Property condition: Well-maintained or newly renovated properties generally yield higher rental incomes and require less maintenance costs, positively affecting ROI.
- Market trends: Real estate market conditions, including housing demand, rent prices, and economic factors, play a role in determining ROI.
- Financing costs: The terms of your mortgage, including interest rates and loan duration, influence your overall investment cost and…