Follow This Foolproof Guide to Maximize Your Rental Property's ROI

The last thing you want as an investor is to have an asset in your portfolio that consumes more money than it generates. That’s why it’s important to calculate your potential return on investment (ROI) before making a purchase, especially when investing in real estate.?

What Is ROI?

Your ROI is a calculation that compares the amount of income your investment generates to the costs of purchasing and maintaining it. This considers things like your investment properties’ cash flow, and necessary repairs such as roof maintenance, plumbing, and in-home repairs. Estimating ROI is a crucial step in ensuring your investment makes financial sense, but that doesn’t mean you won’t run into unforeseen hurdles that hurt your revenue stream.

ROI vs. NOI

When determining the income potential from a real estate investment, you’ll often see two important metrics referenced: ROI and NOI (net operating income). While the former shows how much you are earning vs. how much you are spending in total on a property, the latter looks at a property’s potential income after paying only operating expenses. Operating expenses will include property management, regular maintenance, insurance, and taxes (so, they exclude costs like mortgage payments.) If a property has a high NOI, then it can pay more to the investors, which can raise the ROI.

Looking at ROI and NOI together will help you understand your potential profits, though in this article, we will be focusing on ROI. ?

Read on to explore 7 strategies that can help you maximize your return on investment.

Key Influencing Factors

Most real estate investors use a 10% return on investment as a benchmark for a property that is worth their while. The amount of return you see from your real estate property is affected by factors such as location, market conditions, and the demand and desirability of your property.

Conducting thorough market research so you know where the most lucrative markets are for investors is the first step to making sure your investment is a success. Markets that have high demand for rentals coupled with employment opportunities for residents and a steady influx of new residents tend to be great settings for real estate investments. However, the state of a real estate market isn’t the only factor you must consider. The ideal type of property for you, whether that be commercial or residential, can vary depending on the market you’re in. You’ll need to consider the condition of the property and what improvements it will need to maximize your rental income before purchasing — even in a hot rental market.

Once your property is ready to be rented, you’ll also have to implement an effective marketing strategy — which may cost you, if you lack time or ability to begin marketing by yourself. This will help you sign leases quickly, allowing your property to begin earning income. Some investors may even want to consider hiring a third-party management company to oversee an investment on a day-to-day basis.

When you consider everything that influences your ROI, you can begin to develop a strategy to make sure you are making smart investment decisions.

Strategies to Improve ROI

1. Conduct Market Research

Some markets, where demand outweighs supply, may offer more opportunity to real estate investors. When your property is in a high-demand area with low rental vacancy rates, like San Diego, CA or Boston, MA, you sustain tenant interest. That doesn’t mean a property in a lower-demand area cannot be successful, but it does make it significantly more difficult to fill that property. Things like job availability and high wages can affect why some locations are more popular for rental housing than others. Cities home to popular universities with rising enrollment rates can also influence the supply and demand for housing in a particular market.?

2. Invest in the Ideal Property Type for You

There are two types of rental properties you can invest in: commercial and residential. When choosing between the two, you’ll want to consider what the market is looking for. Some cities see more success with residential over commercial properties, or vice versa. Regardless of which you choose to invest in, there are some universal considerations when selecting your ideal property:

• The condition of the property plays an important role in determining if it is the right investment for you. If you are purchasing land and not a building, construction costs need to be factored in. Either way, the initial investment will need to be weighed against the amount of time it will take for you to see a return on that investment.
• Your rent potential should always be considered against your estimated management costs, which include property taxes, interest rates, and inflation. If the amount of income you can make is less than the management and operating expenses of the property, then it’s not going to be a good investment.

It’s important to note that commercial real estate was massively impacted by 2020’s COVID-19 pandemic, with some even believing this sector of real estate to be in a recession. Cities like San Francisco and Los Angeles, CA as well as Chicago, IL, among many others, have as much as 31% of office space remaining vacant into 2023.?

3. Increase Cash Flow

There are factors outside of location and the property’s condition that affect your cash flow, such as your rental pricing, cost inflation for replacement fees, and charging additional fees outside of the rent.

• You should strive to offer competitive rental rates in your market or you will struggle to maintain occupancy at your property. On the other hand, your rental pricing should be set at a higher rate than what it will cost to maintain your property each month, which considers things like regular maintenance, appliance replacements, HVAC needs, and emergency repairs. Maximizing your rental income plays a direct role in your cash flow, so study the rental market trends and the competition in your area.
• Some property investors inflate the cost of anticipated expenses and build that into their penalty fees, such as key replacement costs. Many leases will set the expectation that residents are responsible for a lost or damaged key, and where the tangible key may only cost you $10 to replace, the cost outlined in your lease is $25 to include any intangible loss. If you estimate five key replacements a month, then $75 out of the $125 earned from key replacements is considered income.
• Monthly rent collection isn’t the only recurring income you can be earning from your rental property. In fact, many tenants expect to pay additional fees, whether that’s for amenity fees, covered parking, pet rent, short-term premiums, or even upgraded unit styles. Offering add-ons for an additional cost is a great option to supplement rental income.

Having good cash flow gives your investment a cushion against unexpected expenditures. If you want to keep your rental property’s ROI healthy, consider implementing a mix of the above strategies.

4. Craft a Marketing Strategy

When investing in housing, you shouldn’t always expect your tenants to come to you. It is essential that you have a marketing plan to let potential renters in your market know that your rental is available. Your rental property will be competing with many others, so creating positive brand awareness while highlighting features that elevate your property above the rest is key to filling your space. The only way for your investment to generate cash is for you to sign leases, and the quickest way for you to sign leases is to find potential tenants and get your product in front of them — whether it’s with physical advertising in your city, a strong social media presence, or partnerships with local businesses, among many other options.

5. Consider Capital Expenditure?

Whether acquiring an existing build or starting from scratch with construction, you can expect to invest money up front. That expense is considered a capital expenditure, which refers to the money you invest to procure, maintain, upgrade, or extend the life of your asset. When purchasing your property or designing building plans, you’ll want to evaluate the cost of those expenses against the potential earnings you can make, which includes rent and any upgrades you add to improve the property value. For example, if you acquire an older building with few amenities, but you find that you can charge higher rent prices, maintain higher resident retention rates, or sign leases to new tenants more easily by adding a fitness center, then that capital expense is worth considering.?

Your cap. ex. doesn’t just affect your investment at startup, either. You can expect capital projects to happen throughout the years of owning a rental property. Capital expenses can include property maintenance like parking lot repairs, major building renovations or repairs, roof replacements, and amenity upgrades, to name a few. While not all of these may apply to your property, it’s still a good exercise to consider what expenses may pop up down the line. An unexpected expense is one that can damage your ROI and your bottom line, so being prepared with a budget and cushioning your ROI with recurring income will help you stay protected.

6. Offer Elite Customer Service

Keeping your customers happy is one of the easiest ways to ensure that they continue doing business with you. Some residents will tolerate poor service from their property manager if the rental property checks off all their boxes, but that doesn’t mean customer service isn’t an integral part of your ROI. When you offer the best in service, you are more likely to keep quality tenants with you longer, benefit from recommendations and positive word of mouth, and even receive positive online reviews if you have a website. All of this leads to easier leasing, higher rental pricing, and a thriving business for property owners.

7. Outsource a Management Company

Managing a rental property, especially if it’s a commercial property, can be incredibly time consuming. Considering some investors diversify their portfolio with multiple real estate properties, it can be near impossible for them alone to manage those properties without help. Property management companies handle everything from finances to marketing, taking the burden of managing a successful property off you.

The Bottom Line

Generating a positive ROI is not a simple or quick process, but by using the strategies in this article as your guide, you’ll invest in your next real estate venture with ease, knowing you have the tools to maximize your ROI to its full potential.

To see more posts on how to make the most of your rental properties, check out our Owner Resource Center and follow us on LinkedIn.