Purchasing a rental property in Orlando is a smart choice if you’re looking for a safe and profitable investment. Being the owner of a rental property allows you to have a constant flow of income while the value of your properties increases due to appreciation.
Before becoming a first-time landlord, you want to learn how to tell if the property you’re interested in purchasing is lucrative and if you’re making a good return on your investment.
An ROI Rundown
A return on investment (ROI) allows you to look ahead at how profitable your investment will be. When purchasing a rental property, you want to make sure it will be a profitable investment. ROI allows you to peek into the future and avoid any surprises; it makes sure your investment will be profitable before having to make the purchase.
Before you begin calculating your ROI, it is important to have the following details:
Information About the Property
Any appraisal done on the property should include the value of the investment, the amount you can rent it out for in that area and the total area of the property including building details.
Oftentimes, a onetime payment will be necessary when purchasing an investment property.
This payment could be due to for permits, insurance, or payments to town authorities.
Mortgage or Loan Payments
It is necessary to keep track of all the mortgage and loan payments you must make for the property when calculating ROI.
Information on Tenants
Learning about the amount of rental space on the property, if you will be able to rent to multiple tenants and the expected vacancies, are all useful in calculating an accurate ROI. Property management companies can help you determine and analyze these metrics.
Expenses That Come With Renting
Many expenses need to be added to your calculations including maintenance costs, fees for property management, monthly cost of utilities, necessary repairs and Home Owners Association (HOA) fees.
Net Operating Income (NOI)
Once you have all the required information, you can start calculations for your ROI. The first step is to calculate the Net Operating Income (NOI). Start by figuring out what your annual income will be from the property by adding up all earnings including parking fees, rental and any other revenue.
This will give you the gross income your property. Next, find all your operating expenses and add those together. In order to calculate the NOI, take the gross income and subtract all the operating expenses. Ideally, your NOI should be a positive number.
A subcategory of the NOI is the annual cash flow. This number is important to know when you need to see how much revenue you will make or lose after all the other expenses such as the loan and mortgage are paid.
Annual Gross Rent Multiplier (GRM)
Next up, you’ll want to calculate the Annual Gross Rent Multiplier (GRM). To get this number all you have to do is divide your annual gross income by the price you paid for the property. The purpose of this is to tell you the value of your investment.
Return on Investment (ROI)
The final number to calculate is your ROI. To do this you need to take the net income and divide it by the amount you will be paying for the property. The ideal number here should between 5-10%. Most properties score around 7%. Any property above 10% has a very high return on investment and anything below 5% has a very low return on investment.
This does not mean that you must only buy properties closest to 10%. Every investor has their own strategy and might be willing to take on bigger risks with a property that projects a lower ROI.
It is important to watch out for hidden fees when doing these calculations. Occasionally, properties that seem to have a high ROI have surprise expenses attached to them upon purchase. Investing in real estate involves a lot of calculations and details to watch out for.
Owning a rental property is not unlike owning any other business. You want to make sure you will be making money on your investment. Learning the right ways to calculate you ROI is a vital step in deciding if a property is the right choice for you based on your financial abilities and the profit from the property.
If you are an Orlando property investor or landlord the team at RentSmartUSA has the expert skills to assist you in making the right decision to maximize your return on investment.
Contact us today to learn more about our comprehensive property management services.