How Much Should You Make on a Rental Property
How Much Should You Make on a Rental Property
The primary goal of investing is to make money, so there must be some profit earning potential when you decide to invest in real estate property other than your home. There are two ways to earn from a real estate investment: use it as a rental property that earns rental income and/ or by selling it at some point in the future for capital gains when the property’s value has appreciated. Every investor wishes they had a crystal ball that predicts the rental returns and level of capital growth, but there is sadly no such thing! The returns an investor receives rely on a number of factors like the local market, the quality and location of the property itself, the demographic of occupants wishing to in the area, how you market the property etc.
However…we’re going to give you a few tips that are the next best thing to a crystal ball to help you determine how much profit you could make on your next property investment::
Identify the Property’s True Price
Unless you’re inheriting the property, the first thing that you have to consider when buying your investment property is the price. A lot of old school investors use the phrase ‘You make money when you buy’. This is doesn’t just mean you get a good discount, but also means you are acquiring an asset that will make you a profit. Do all your financial calculations, factoring maintenance fees, property tax, legal fees, refurbishment or renovation costs, tenant turnover (void periods), and agency fees for the management of the property. Like any other business, real estate investment carries an element of risk, such as problem tenants, maintenance issues, and unforeseeable events like natural disasters. On top of that, regardless of whether you plan to rent or resell the property afterwards, investing in real estate needs a good amount of cash. You need a bigger down payment for investment properties than standard residential properties, so it is critical to make financial assessments to protect your investment in the event of a market downturn. However, the rewards can far outweigh the risks if the right care and preparation is taken before making the move into the world of property investment.
Compare The Properties In The Market
When choosing a market, you have to determine if it is a good area for rental properties because this will determine how much money you’ll make on that property. Ask yourself the following questions: is it near public transport? What is the distance from the nearest offices? How far are the good schools? Is there a shop or supermarket nearby? What is the distance of the nearest hospital? Etc. On top of that, do your research by comparing the average rental rate in the market the property belongs to. Collect data to see what are the going rental rates. You can obtain this information from certified real estate agents, property management companies, or through online data sources, but be prepared for a broad range as properties of different qualities and sizes will command different prices and rental rates.
Account For Possible Expenses
Factor all the possible expenses you may incur that could be associated with the rental property. The property itself may be affordable and it can be situated in an area with high rental rates. However, these are not the only considerations. For instance, an older property will require more maintenance than a new one. There are several necessary expenses that should be taken to account when determining how much profit would be made on rental properties. These expenses that affect your cash flow are: insurance, maintenance, utilities (depending on your arrangement with the tenant), property management, maintenance, property taxes, service charges and ground rent (if applicable), and rental income tax. Accounting for all of these will give a clearer picture of the profit potential or the net return on investment you can expect every month.
Calculate For Returns
After determining the property price, comparing the market, identifying the rental rate, and ascertaining the potential expenses, you now have enough data to determine how much profit you can hope to make. Focusing on these details and not just property appreciation is the more stable component. Relying on valuation is risky because you can never be sure how the prices of homes are going to increase.
Calculating for returns is the most important of all because as an investor, you always want positive returns. There are several metrics used to find out the possible returns a rental property can generate based on the amount of its rental income. These are cash flow, cap rate, and cash on cash return.
• Cash flow: Focusing on cash flow basically summarizes how much money you’re going to put into the rental property versus how much you’re getting. Simply put, it is rental income minus rental expenses. To make a profit, the former has to be higher.
• Yield: This is a common metric for calculating property returns, also known as capitalisation rate. It describes the rate of rental return regardless of the method of financing. This uses the cash flow in its calculations to project the amount of profit as a percentage of the property’s market value. Basically, use the gross and/or net operating income divided by the current property price.
• ROI (Return On Investment): This is another metric that uses your net operating income or total cash investment as a determinant for profit. Simply put, it is computing the annual rental income minus the operating costs (property taxes, insurance, homeowners fees, etc) divided by the total cash you invested into the property.
Being aware of all these data will help you calculate for the projected financial gains you can potentially get from a rental property. Knowing these can help you adjust the rental rate, so you can maximize your profit earning potential. The point of investing is to earn profit, but remember that it doesn’t happen overnight. You have to be willing to do the research and the leg work so that you can generate significant financial returns.
Get in Touch
Interested in UK property investment options? talk with us directly, you can call us on +44 (0) 2039507939 or send us an email at firstname.lastname@example.org. If this is your first time landing on Thirlmere Deacon Property Investments, I encourage you to visit our homepage https://tdpropertyinvestment.com to read more about us and to see what we have on offer.
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+44 (0) 2039507939