Investing in rental properties is one of the best ways of earning a passive income in real estate. When done correctly, investing in single family homes, condos, apartments or multi family homes can be very lucrative. According to the S&P 500 Index, the average return on investment for US real estate in the past 2 decades has been about 8.6% per annum. The good news is that you can increase ROI on rental property and earn even higher returns.
A Quick Overview of ROI
Return on investment (ROI) is a metric used by real estate investors to assess the profitability of a rental property. The rate of return on a rental property is calculated by dividing the net profit earned from your investment by the costs incurred. Here is the formula for ROI:
For instance, let’s say you purchased a single family home with $180,000 in cash. You spent $20,000 on renovating the home and $1,000 in closing costs. This means that the total amount invested in the property is $201,000.
The rent collected is $1,500 every month. One year later, you will have made $18,000 in rental income (assuming a full occupancy rate). The expenses incurred (insurance, property taxes, water bills, etc.) added up to $2,400 for the year. Therefore, the return on investment will be:
($18,000 – $2,400) ÷ $201,000 = 0.077 or 7.7%
Related: The Real Estate Investor’s Guide to the ROI Formula
5 Ways to Increase ROI on Your Rental Property
Here are some ways to increase ROI real estate:
Use Mashvisor’s real estate investment tools
If you want to increase ROI, start by finding lucrative Airbnb and traditional rental properties for sale in the right location. The following tools will come in handy when searching for a higher ROI investment property:
- Mashvisor’s real estate heatmap tool – This is a tool that shows you the high ROI locations for real estate investment. You can analyze different neighborhoods using filters such as listing price, cash on cash return, rental income, and Airbnb occupancy rate.
- Mashvisor’s property finder – This tool uses big data and predictive analytics to compare different rental properties for sale across various locations and provide you with a list of high return properties. It comes with filters like budget, location, rental strategy, number of bathrooms, number of bedrooms, and property type.
- Mashvisor’s rental property calculator – This investment property calculator helps real estate investors estimate the expected expenses, rental income, and profit from a rental property. The most important metrics involved are cash flow, cash on cash return, and cap rate. Mashvisor’s rental property calculator will also show you the optimal rental strategy to increase ROI on your investment property.
Related: What Is a Good ROI for Vacation Home Rentals?
Do upgrades or renovations
Doing major or minor renovations before welcoming new tenants will help increase ROI on your rental property. People would be willing to pay more if your investment property stands out from the competition. Here are some of the things you can do to increase the return on real estate investment:
- Add square footage – Adding more space to your rental is a great way to increase ROI. You could add an extra bedroom, attic, sunroom, or even expand an existing room by removing walls.
- Improve your flooring – A new floor will attract anyone looking for a home to rent. You can upgrade your flooring to vinyl, concrete, laminate, tile, or hardwood. Alternatively, you could invest in a higher quality carpet to maximize return on investment.
- Upgrade appliances – Even if you don’t have the money to buy the latest appliances in the market, you should ensure that all the appliances in the home are up-to-date to improve ROI. This includes the HVAC system, smoke detectors, refrigerators, carbon monoxide detectors, and generators.
- Landscaping – Curb appeal plays a major role in determining the value of your property. You can improve your landscaping by planting flowers and trees, installing a custom porch, including outside furniture, and adding exterior lighting.
Related: What Is a Good ROI for Rental Property?
Advertise effectively
Having an effective marketing strategy will help you attract the right clients for your rental property investment. You can advertise your property on the multiple listing service (MLS) or on sites such as Redfin, Realtor.com, Trulia, Craigslist, Facebook, or Homes.com. Use descriptive words and phrases to highlight the unique selling points of your rental. Don’t forget to mention the amenities available in the area where the property is located. The listing should also contain professional photographs of all the rooms in your income property, as well as the exterior. However, before taking the photos, be sure to clean up and tidy the rooms. Effective advertising will boost occupancy rates and increase ROI.
Screen potential tenants
Getting tenants that pay their rent on time, follow the lease terms, and take care of the rental property is another effective method to increase ROI. To get such tenants, you need to have a comprehensive tenant screening process. These are some of the things you should look at during screening:
- Income – As a landlord, you will want to rent your home to someone that can actually afford the rent. Ask for W-2s and pay stubs to check the potential renter’s income.
- Credit history – Running a credit check on potential renters will reveal how much debt they have and their history of payments.
- Criminal background – A criminal background should be a big red flag when screening a potential tenant.
- Previous landlords – Get in touch with the tenant’s previous landlord and ask some questions. A history of damage or late payments should get you worried.
However, be careful not to violate the Fair Housing Act when screening potential tenants.
Encourage tenants to stay longer
When you find tenants that are financially stable and have a good background, you need to find a way of retaining them as long as possible. This will minimize your vacancy rates, ensure a steady cash flow every month, and increase ROI. One way of retaining tenants is getting them to sign long-term leases for 12, 18, or even 24 months. You can sweeten the deal by offering a discount. For example, tenants signing a 12-month lease could get a month free of rent.
Conclusion
If you are wondering how to increase ROI, these are just some of the strategies you can use. If you apply these methods effectively to maximize ROI, you will be assured of positive cash flow in the long-term for your rental property business.
To learn more about how Mashvisor can help you find profitable investment properties, schedule a demo.