One of the most important things most real estate investors consider before deciding to purchase houses in Dallas TX for rent is the return on investment of a rental property (ROI). An investment must show a reasonable ROI to indicate success. If the numbers for a potential investment don't work, it's better to walk away and find another property with better-estimated returns.
What about rentals that you already own? Are you monitoring the ROI? Here's what investors need to know about calculating the return on investment.
The return on investment measures the amount of money or profit an asset can generate. The return on investment of a property represents a percentage of the total cost of the investment. It shows how efficiently and effectively investment funding is used to generate profits.
An excellent return on investment makes it possible for investors to assess the property's profitability and whether investing in it is the right choice. When managing rentals, the ROI helps investors understand if a property loses money or generates income!
Return on investment is available for any investment, including stocks, bonds, real estate investments, and even a savings account. However, calculating a solid return on investment for residential property in Dallas comes with several challenges because anyone can manipulate calculations.
If investors aren't aware of critical numbers and the right formulas, it's possible to include or exclude certain variables in the analysis. The challenge is even more significant when investors can either pay cash or take out a mortgage on houses in Dallas TX for rent.
What are the best ways to calculate a credible ROI? Use these insights based on a cash investment or financing a property with a mortgage.
The cash-on-cash return measures the pre-tax cash flow received compared to the total amount of money invested in acquiring the property. This is the easiest and most common method most investors use to calculate the return on rental property investment. Also referred to as an equity dividend rate, the cash-on-cash return is calculated by dividing the annual pre-tax cash flow by the total amount of money invested in the property.
Investors must understand these two numbers when calculating ROI for a cash property:
The cash on cash return method comes with various advantages, including its simplicity. Your ROI is simply the total amount of investment divided by estimated monthly rental income.
This ROI calculation also offers a great way to simultaneously measure several investment properties' profitability, making it easier for investors to choose houses in Dallas TX, for rent that provide the best potential return. With the cash on cash return calculation, property investors can think ahead and consider the expenses that come with potential real estate property.
On the downside, cash on cash return does not consider appreciation. Appreciation remains a crucial consideration for anyone purchasing rental property since a property with an ineffective cash flow and poor rent returns can turn into a good investment due to an improvement in its market value as time passes. A DFW property management company can help you with the ROI calculations on your existing rentals or properties you're considering as additions to your portfolio.
While adding your mortgage payment into the equation isn't a significant complication, it's critical to factor it when evaluating ROIs. Not every Dallas investor can buy rental properties with cash. Financing a property with a mortgage is common practice, but it doesn't affect how you calculate ROI!
In addition to any cash amount you put down on the property, your monthly investment property mortgage must be included as an expense when evaluating ROI. Your total invested dollars includes out-of-pocket expenses (down payment, mortgage payments, renovations, closings costs, etc.) divided by the potential rental income for the property.
No matter how you purchase houses in Dallas TX for rent, work with a property manager to monitor ROIs and optimize rentals to maximize returns!
While ROI is an important metric, a low ROI doesn't mean your rental property is doomed forever. If your current expenses outweigh the rental income for the property, your returns suffer—but making critical changes can turn your income around!
A DFW property management company can analyze your returns and properties, then recommend changes to boost ROIs. Finding and retaining better tenants, adjusting the rental rate, addressing maintenance issues, and making smart upgrades can help you generate more income while reducing costs.
If you plan on investing in real estate Dallas real estate, it's critical to know how to calculate the return on investment—and understand what it means for your long-term wealth! RentHub is here to help you learn more about the financial success of your rental properties and apply strategies to your bottom line. If your rental property ROI scares you, let's talk about how we can boost it!
The easiest way to learn your ROIs is to use our free Investment Property ROI Calculator! Download it today.