Learn the Return on Investment
(ROI) for Your Rental Property

People who want to buy real estate many times don’t “do the math” to learn about the return they can earn on their investment properties.  Owning investment real estate is in many ways just like investing in other things.  Many people buy stocks, mutual funds, bonds or have money in a bank account.  They want to know the Return on Investment (ROI).  Unfortunately, the ROI for bank savings, money market account, and bonds is very low today.

When you own investment real estate, you need to track how your investment is performing.  Anyone who owns a rental property should treat it the same way that they treat a stock or mutual fund investment.  It is important for you to know the Return on Investment (ROI).  We recommend that real estate investors review the ROI at the start of every year.  This is so that they know the current ROI.

Here is a simple example.  You invest $20,000 cash to purchase a single-family home.  The home has a market value of $120,000.  This means that you would have a $100,000 mortgage.  At the beginning of the purchase, you have $20,000 cash invested.  Assume that you collect net rental income of $415 per month.  That is rent received after paying expenses (mortgage payment, taxes, insurance, repairs, etc.).  This would result in 25% ROI on your cash as shown below:

Net Profit x 12 / Your Equity Investment
($415 x 12) / $20,000 = 24.90%

Looking at this same property after five years, the numbers look very different.  The home’s value has appreciated.  It is now worth $145,000 based on the comparable properties in the area.  Also, the amount of rent collected has increased.  This raised the net rental income to $475 per month.  The mortgage value is now $10,000 less because of the mortgage payments that were made.  This means that the Equity Investment is now $55,000 ($20,000 + $10,000 + $25,000). The formula is the same, but the numbers are different:

Net Profit x 12 / Your Equity Investment
($475 x 12) / $55,000 = 10.36%

The decline in the ROI that happened over 5 years is because the equity in the property increased to $55,000.  The income earned, though, did not increase relative to the investment.  For the ROI to remain the same, the net rental income would need to increase to $1,150.  There are only two ways to accomplish that.  The first is to increase the rent received.  The second is to reduce the expenses.

If the house were sold at this point, it would result in a $145,000 sale and a mortgage pay-off of $90,000.  That would leave proceeds of $55,000.  This money could then be used to purchase another property or another investment at a higher rate of return.  In this type of situation, there are a few options.  First, the owner could sell the property.  Second, the owner could raise the rent to increase the ROI.  Third, the owner could re-financing the current mortgage based on the new value.  This can be used to take cash out to reduce other debt or to purchase another investment.  Which of these options is right for you is something that you should weigh carefully and discuss with your financial planner.

We developed an Excel Spreadsheet that we can use to determine the current Return on Investment for any property.  There are certain numbers that are important to get an accurate result.  Those include the current market value, current mortgage balance, yearly income, yearly expenses, depreciation items and your tax bracket.  We would help you to Determine the Fair Market Value of Your Property first.  Once we plug in the appropriate numbers, we can then save the spreadsheet so that we can update it every year or as needed.

This is a relatively simple analysis tool for finding out quickly the investment potential of a home.  We will be happy to help you to do an in-depth analysis.  It is highly recommended that you do NOT use sources such as Zillow or Ownerly to find your home’s value.  The algorithms that they use simply are not accurate.  You can read a little more about that in How Do I Determine What My Home is Worth?  This is found in our Frequently Asked Questions.  

The Owners and Agents at DMS Properties, LLC Residential Real Estate Services understand investment real estate.  We are actively purchasing investment properties in Maryland for our own portfolios.  We generally use a “buy, fix and hold” strategy to generate monthly rental income.  We also evaluate properties using a “buy, fix and flip” strategy to capture renovation appreciation.  We are anxious to help others who are interested in buying real estate to accumulate wealth through either philosophy.  With that in mind, we might consider an investment group philosophy whereby interested investors join forces with us to purchase investment properties together.

We have found that Maryland is a very good area for investment real estate.  This is due partly to our close proximity to the District of Columbia, the many Federal Government offices and various military installations.  If you have an interest in investing in residential real estate in Maryland, Contact Us so we can discuss a potential partnership.  We can help people who don’t feel they have sufficient knowledge or funds to accomplish it on their own.  We are developing the necessary “operational agreement” that would outline the role that each participant would play in the venture.  It would naturally pass a review of our legal counsel, too, so that we make sure that everything is being done right!