It is common knowledge that real estate properties are among the best ways to amass wealth and make money. After all, they are called ‘real estate’ for a reason. But what you don’t hear very often is how the real estate moguls and companies worldwide increase their return on investment (ROI).
As a landlord, the ROI is perhaps the most important metric you need to calculate and workaround. If you own multiple properties, calculating the ROI can help you compare their performances and evaluate their worth over time.
Though it is vital, many investors find it challenging to figure out the right ROI. However, real estate companies in Qatar and other parts of the world adopt different methods for calculating the ROI to bring in better returns on their properties.
Calculating The Return On Your Investment
The simple formula used to calculate the rate of return for any given property is as follows:
ROI = (Gain From Investment – Cost of Investment)/Cost of Investment
Hence, assuming you invested $60,000 in your rental property, and gain a total profit of $90,000 from your investment, your rate of return on this property is:
ROI = ($90,000 – $60,000)/$60,000 = 0.5 = 50%
Please bear in mind that this is a simplified rate of investment that doesn’t consider the time and other variables. Two other formulas used to figure out the return rate on a rental property include the cash on cash return and the cap rate.
With the knowledge of these formulas, here are three ways to maximize your rental properties’ returns.
Improve Property’s Presentation
In property investment, the first impression is essential for short and long-term value. Thus, clean, fresh, and attractive properties pique more tenants’ interest and set the foundation for a profitable rent. If you want to maximize your rental property returns, you’ll need to increase its competitive appeal.
This ensures that it catches the right eyes, which will be ready to spend good money. Ideally, you must prepare the property for rental. And this involves looking at it through the eyes of prospective tenants. You can do the following four things to boost the appeal of your rental property.
- Fix The Exterior – First, you need to boost the curb appeal of your property. Remove fallen leaves, clear all litter, and if possible, apply fresh painting.
- Tidy Up The Interior – Give the interior a thorough cleaning to make it as habitable as possible.
- Upgrade Appliances: While you want to keep a low budget, you also need to install somewhat up-to-date appliances.
Rent To The Right Tenants
When you’ve done all the necessary preparations for your property, it’s essential to ensure that it attracts the right tenants. Managing rental properties involves collecting rents, and that’s when you make good on your investment. Therefore, you need to ensure that your tenants can pay their rent on time. Also, tenants need to take good care of the property and stick to the tenancy rules and the terms of the lease.
You can do this by having a functional tenant screening process. Such an approach helps you determine the right tenants. You can use this to find out the track records of people and decide whether they will make excellent tenants.
Part of this also depends on how and where you market your property to bring in tenants. As a property owner, having a big enough and competitive pool of potential tenants ensures that you get the most competitive rents.
Some essential facts to check about prospective clients include:
- Previous landlords
- Recent or current employers
- Credit history
- Annual income
- Criminal background
Manage Rental Properties Properly
You’ll also need to manage your property strategically to extend its lifetime value and maximize the returns it brings you every year. This starts with continuous care and maintenance of all aspects of the property. As a property owner or manager, the standard procedure to keep in mind is to solve small issues before becoming big problems.
This approach ensures that your overall expenditure remains small and cost-effective. For instance, it will cost you a lot to maintain the fixtures and appliances in your properties. However, using about $100 or less, you can fix small faults like replacing furnace filters or maintaining the HVAC system.
On the other hand, ignoring this can lead to more expensive repairs or replacements if these systems don’t receive regular maintenance. Usually, this also translates into happy tenants that pay on time, stick around longer, and recommend your properties to other tenants.
As an investor, you should work to maximize the returns on your rental properties. And this means you have to know how to calculate the return rate, depending on whether you made a down payment or a full cash payment.
Based on the type of property you own, you can expect a gross revenue of 12% of the purchase price per year. Like every other property, it will come with some expense, and if you deduct these, the net revenue of your property should be between 6% to 8% of the purchase price. But you can potentially boost these figures with the three tips above.