Calculating ROI for Cash-Purchased Rentals [McKinney Property Management]

Return on investment is a critical indicator of success (or failure) when investing in McKinney TX rental properties. What's the ROI for a rental when a real estate investor purchases it with cash? 

When calculating ROI, the formula used varies depending on whether the rental property was purchased using cash or financed with a mortgage. In this guide, our McKinney property management experts will help you learn the most straightforward formula for calculating ROI—or the total amount of cash earned on the total amount of money invested. 

ROI Isn't Profit

Having money in your pocket at the end of every month (after paying the bills) is the profit you generate from a rental property. However, having "some" profit isn't necessarily the sign of a "profitable" rental or a sure indication of long-term success. 

To truly evaluable profitability on an investment, rental property owners need to rely on ROI calculations. The formula is a reliable way to analyze all property costs against rental property income to determine if a rental is on track toward your goals or if adjustments need to be made in your operations to improve returns. 

Whether you finance rental properties or have the resources to pay cash for the total costs of a new rental, checking on the ROI from time to time is a smart way to monitor success.

How to Calculate Real Estate Cash on Cash Return

When paying cash for a property, the ROI formula becomes a simple "investment cost vs. return" formula. You aren't dealing with a mortgage payment or additional financing costs that add to the formula when evaluating returns. 

Begin With the Sale Price of the Investment Property

In today's property management teaching session, your new McKinney TX investment property has a sale price of $400,000. After final closing costs, your cash payment for the property is $412,000.

Before the property can hit the rental market, you invest another $8,000 in renovations to attract quality renters. At this point, your total cash investment is $420,000 for the rental. 

Include Additional Rental Property Costs

Even though you paid cash for the total price of the property, that's not the end of your investment costs! Every rental home (just like a private residence) has ongoing annual costs to maintain its operation. 

To evaluate accurate returns, real estate investors can't stop at the purchase and initial start-up costs. Your formula must also include additional expenses, like:

• Insurance premiums
• Property taxes
• Utilities (while your rental waits for a new resident)
• Property management fees
• Maintenance throughout the year

While your rental is in excellent condition after renovations before it hits the market, it needs ongoing preventive maintenance to keep it in good shape after renters move in and throughout every season of the year. For this exercise, your annual operating costs are $10,000 for this investment property in McKinney. That brings the total investment amount to $430,000.

Factor In Rental Income

How much money did your rental make in the first year? With an anticipated monthly rent amount of $4,000 or 1% of the home's value, your annual return is $48,000.

To calculate the returns, divide the annual rental income ($48,000) by the total investment cost ($430,000). The return on this real estate investment is .111. When translated into the correct profitability ratio to represent ROI, you'll see the number as a percentage. In this case, multiply that .111 by 100 and your return on investment for this McKinney rental property is 11.1%. 

Is Your ROI Good Enough? 

How would a property management company evaluate that ROI? Your ROI for a rental property is good enough if it meets your goals! 

Every rental will have a unique return on investment, depending on your costs for the investments and a competitive rental rate. While the numbers we've used here are basic estimates for the purposes of illustration, a McKinney property management team can help you find a rental property with excellent potential for success, then analyze the market to set the ideal rental rate and apply strategies to maximize returns. 

An ROI is also only good enough if your property stays occupied. Many factors go into the returns for an investment, including reducing costs while delivering quality rentals at competitive prices. A $4,000 monthly rent amount might not be the right rate for a $400,000 property if the market analysis from a property management company says it should be lower (or higher) to keep it occupied with good returns. 

A property manager can also help you identify aspects of your rental's management that work against better returns. If you deal with high tenant turnover, miss lease renewal deadlines, or delay critical maintenance throughout the year, you could be losing money as a result of these issues. 

Choose McKinney Property Management to Analyze and Maximize Returns

What can you do if the formula delivers a return on investment number that doesn't meet your expectations? Choose McKinney property management to optimize operations, find quality renters, improve on-time rent collection and tenant renewals, and reduce costs for rental properties! 

RentHub has the local experience real estate owners depend on to generate optimal returns on their investments. If your rental property isn't meeting your financial goals, let us help!

Learn more about calculating ROI! Click to use our free Investment Property ROI Calculator.

Calculate Your ROI