Calculating the return on investment (ROI) for rental properties is essential for assessing whether a property will be profitable. The ROI measures how much income the investment generates relative to its cost. Here’s a step-by-step guide to calculating ROI on rental properties.
1. Calculate Annual Rental Income
Start by determining the expected annual rental income. Multiply the monthly rent by 12 to get the annual figure. For example, if the property rents for $1,500 a month, the annual rental income would be:
- $1,500 x 12 = $18,000
2. Subtract Annual Operating Expenses
Operating expenses include property management fees, repairs, insurance, property taxes, and maintenance costs. If annual operating expenses total $4,000, subtract this from the annual rental income:
- $18,000 – $4,000 = $14,000
3. Determine Total Investment Cost
The total investment cost includes the property purchase price, closing costs, and any initial repairs or improvements. If you paid $150,000 for the property and spent $5,000 on closing costs and renovations, your total investment cost would be:
- $150,000 + $5,000 = $155,000
4. Calculate ROI
Finally, divide the net operating income (annual income minus expenses) by the total investment cost, and multiply by 100 to get the ROI percentage:
- ROI = ($14,000 / $155,000) x 100 = 9.03%
This ROI calculation can help you determine if a rental property is a good investment. Compare it with other properties or investments to make informed decisions and maximize profitability.