Any real estate purchase is a big investment, from a two-bedroom house by the airport to a high-rise condo in Miami Beach. You want to know you’ve made a good rental investment, and question one is probably when you can see a return on it.
Setting realistic expectations can keep you from being disappointed. Rentals tie up a lot of cash for a while but can turn a profit if you can commit for the long haul. As an investment strategy, it’s all about property value and cash flow.
Let’s look at how to invest in rental property that turns a profit and how to calculate it.
Return on Investment
ROI is about how much profit you make as a percentage of what you spend to buy the property. You won’t be able to see that entire return until you sell the property, but you can calculate the rate of return you might expect.
You’ll need to know the following numbers:
- How much you paid
- How much you expect to sell for
- Any expenses from a loan
- Other expenses like maintenance costs
Doing the math is easy if you paid cash for the property. If you didn’t, a rental investment calculator can help you account for loan expenses and other costs.
You can also look at profit from the angle of a single year. Most of the time, you can get positive cash flow right from day one with your rental.
Figuring out your profit for the year is a matter of taking how much rent comes in and subtract how much money goes out for expenses like taxes, insurance, and mortgage payments. What you're left with is your profit for the year.
Factors That Impact Profit
When you’re making your rental property investment, there are a few things you can do during the process that eventually impact your profit. Keep them in mind as you choose a property, and you can improve your long-term results.
How much you spend initially to purchase the property impacts expenses in the short-term and your eventual long-term profit when you sell. Whatever the price, you need to ensure the rent will cover the expenses that result.
Property conditions can cut into your profits, so you need to include those in your initial calculations as well. Buying a property in better condition for a higher amount might make more money in the long run. Choosing an improving Miami neighborhood can have a similar effect as you might get more in rent as well as sell for more later.
But no matter how well you plan, things happen that can eat into your profit. Raising the rent isn’t always an option for getting it back, either. A few unexpected things you can’t plan for might include:
- City tax assessments for special improvements
- Expensive repair like a new roof after a hurricane
- Increase in property tax
- Increases in insurance premiums
Need Help With a Rental Investment?
Figuring out your profit on a rental investment doesn’t work the same way as for other investments. Factors like mortgage rates, unforeseen repairs, and tax hikes can cut into that profit each year, so you need to plan accordingly when you make a purchase. A wise purchase can bring you a profit from your first year owning in Miami and provide a great long-term ROI.
If you need help with getting the most profit out of your rental, contact us to learn how our property management services can actually save you time and money.