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What Is a Good ROI Percentage for a Rental Property?
Many people are looking for a way to diversify their investments, and one of the ways to do so is through a rental property. Of course, people wonder how they can make sure they generate enough money through a rental property. People need to make enough money to cover their expenses, but it is also critical to take a look at the possible capital appreciation. How is this return calculated, and what is a good number?
Calculating the Return on a Rental Property
First, it is important to understand how a financial return is calculated on a rental property. The first step is to calculate all overhead expenses. Many items should be included in this list. They include:
- The mortgage payment
- Homeowner’s insurance expenses
- Any real estate taxes
- Any recurring maintenance expenses, including HVAC, plumbing, and roof maintenance
- Any emergency repairs that need to be covered, including roof damage, plumbing damage, floor damage, HVAC repairs, or paint jobs
- Any utility expenses that are not covered by the renter, including electricity, water, gas, cable, and internet
After this, the property owner should take a look at the total rental income. This is usually paid monthly, and the overhead expenses should be subtracted from this revenue. This is the total income generated by that rental property per year.
The Factors Impacting the Return
Next, it is important to take a look at a few factors that could be impacting the potential return on a rental property investment. These include:
- The Demand for Property: The more people there are looking to rent in the local area, the more money a property owner will be able to charge.
- New Development: If there are a lot of new construction projects going on, this could drive up the value of real estate in the area.
- Property Age: In general, newer properties will be worth more than older properties.
- School Quality: The better the local schools, the higher the property values.
- Proximity To Shopping and Dining: If there are lots of shops and restaurants in the area, property values are usually higher.
All of these factors will impact not only how much rental income can be generated but also how quickly local real estate goes up in value.
Looking at a Good Number
Finally, the income generated from a rental property is not the only source of financial return. The other is the capital appreciation of the property. This is harder to calculate because there is no set value the property is worth. The property is worth as much money as someone else is willing to pay for it.
Therefore, there is no set “good” return. It depends on how long the property is held for and how much rental income is generated from that property. Consider reaching out to a professional with any questions about real estate investments
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