What Kind of ROI Can You Expect on Your Rental Property Investment?

When real estate investors decide whether to invest in a rental property, one of the first thing’s they consider is the rate of return (ROI). According to a recent study performed by RealtyTrac, investors earned an average ROI of 9% on their rental properties. Vice President of RealtyTrac, Daren Blomquist, commented on these findings. He said “in the high-risk, high-yield markets, where unemployment and vacancy rates are higher than national averages, the average return was a whopping 19 percent, actually up from a year ago thanks to a strong increase in rental rates.”

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Which Markets Have Seen the Highest ROI?
Several counties in Florida have experienced the highest returns. On average, the annual gross yield has been 17 percent and vacancy rates are as low as 5 percent. Conversely, the counties suffering from the lowest yields include many metropolitan cities known for their high rental rates. For instance, New York County and San Francisco County, recently reported rental rates of 2.4 percent and 3.16 percent, respectively. Here is some explanation of these figures. Many investors who purchased a property in Florida were able to do so at low prices. Afterwards, they renovated the homes and were able to attract higher rental prices, thus, yielding higher ROI’s. When looking at New York and San Francisco, homes in these counties demand high selling prices. So, returns are not nearly as high as in Florida.

Should I Invest in Single-family or Multi-family Real Estate?
Before deciding which investment to make, consider the profitability, risk, and initial investment required of a single-family home versus a multi-family property. Single-family homes tend to be more favorable among young families and those wanting the personal space of a stand alone dwelling. So, if this is the route you choose to take, target desirable, and safe, family-friendly neighborhoods. The best neighborhoods that fit this description are those with a combination of owner-occupied homes and rental properties. If you have a neighborhood in mind and are interested in investing there, look at rental rates on similar properties. This will give you an idea of what you can charge, and help you estimate a rate of return. Let me help you figure out this calculation.

Formula for Calculating ROI on a Rental Property
Follow these four steps to arrive at your ROI:

1. Calculate your (estimated) annual rental income on the property.

2. Subtract anticipated annual expenses from your annual rental income. The result will be your annual cash flow number.

3. Add your equity build to your cash flow to arrive at net income.

4. Divide net income by your total investment in the property. The result will be your return on investment.

Ryan Gravel
Ryan Gravel

Ryan Gravel is an American real estate broker and developer. He began his career at a young age working for his family owned construction company.
After graduating college at the University of Central Florida with a degree in business, Ryan set out to find untapped prolific markets around the world. His search landed him in Playa del Carmen, Mexico where he founded Virgin Realty Mexico and co-founded the Saatal Development Group one of the fastest growing development companies in the Riviera Maya.
With extensive market knowledge, professionalism, etiquette, innovation and integrity Ryan is known as one of the most highly respected real estate advisors in the region.

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