How Much Profit Should You Make From Your Rental Property?
If you want to start investing in real estate, rental properties are undoubtedly the easiest way to start. After all, it’s rather simple to manage and maintain rental properties, which makes them a perfect choice for beginners. However, you should always ask yourself how much profit you should make from your rental property to check whether this kind of investment is indeed going to bring you a decent profit.
Here are a few tips to think about when considering your profit vs. property balance:
What to Consider
To conclusively determine just how much it is that you can make from your rental property, you need to take various factors into account. For starters, it’s essential that you research the property’s price and market rental rates. After all, the market you want to invest in will dictate the prices and your earnings. There are also general expenses that come with owning a rental property as well as the projected returns to the capital. Not to mention that there are extra fees if you want to hire a property manager.
The Price of the Property and Market Rates
The main thing that concerns you when choosing the market for your rental property investment is that the market fits your price range. It also has to promise you a proper return on investment. Therefore, don’t rush into purchasing rental properties before thorough market research. The markets with higher rental rate will allow you to set higher property rent as well.
Include the Expenses
The mentioned research is necessary, not only because you need to know market rates and property prices to calculate how much profit you should make from your rental property, but the required expenses as well. In the end, insurance and repairs may lower your gain so much that it ends up costing you more in the long run. For starters, include the following expenses into your profit calculations: insurance, utilities, property management and maintenance, taxes, HOA fees as well as rental income tax.
How to Calculate the Returns
To determine just how much money you’ll get to make with your rental property, you should calculate your cash flow, and even cap rate and cash on cash return so that you have everything you need in percentage. Essentially, cash flow is the amount you’re going to make when you deduct the expenses from what you get in rent. It’s best to do this with a whole year in mind. With cash flow, you can also calculate the cap rate and cash on cash return.
Cap rate will show the percentage you will make compared to the property’s market value (cash flow/property value x 100), while the cash on cash return shows the portion of what you’ll earn compared to the investment you’ve made (cash flow/money invested x 100).
If you own a piece of land, you need to be smart with all-things-properly – starting with the best places to buy the property, who to rent it to and finally the profit you should make. If you can’t handle this alone, consult with experts. For more information, you may reach us at info@LLCPM.com