How to Crunch the Numbers on Rental ROI Before You Buy

Buying a rental property without running the numbers is like baking a cake without measuring ingredients. You might end up with something that looks like a dessert, but it’s unlikely to taste the way you expected․ By understanding rental return on investment (ROI) before you sign a lease‚ you can get your property to work for you‚ rather than the other way around․

Key Takeaways

Rental ROI is more than simply the rent divided by the mortgage. It also includes the cost‚ vacancy and financing of the property․ Running numbers early allows you to find good properties and avoid surprises later on․

Choose a Basic Rental ROI Formula

After researching lenders, understanding how returns are typically earned is useful. The U.S. Department of Housing and Urban Development has provided information on the rental and home-ownership affordability of different regions. Local data is crucial for calculating ROI. For example, a 1-bedroom FMR is $1,660 in Atlanta, Georgia, while the same-size rental in West Palm Beach runs $1,901.

The formula for rental ROI is: (Annual Rental Income - Annual Expenses) ÷ Total Investment.

The real work comes in defining those numbers accurately․

Estimate Your Rental Income

First and foremost‚ make sure the rent that you're asking for is reasonable in relation to similar homes in your neighborhood․ One of the fastest ways to distort ROI is overestimating rent․

Start by factoring in all expenses. In addition to the mortgage payment‚ there are other costs of homeownership:

• Property taxes

• Insurance

• Maintenance and repairs

• Property management fees

• Vacancy allowance, which is usually 5% to 10%

These costs will quietly sap profits if left unchecked.

The terms of the loan affect your ROI․ Your loan's interest rate‚ down payment and type affect your monthly payments․ Small differences in rates have an effect over time․

Next‚ subtract the monthly expenses from the monthly income to arrive at the estimated cash flow‚ which you then annualize to get ROI․ A positive cash flow may indicate it is worth holding the investment. A negative cash flow may indicate it is not․

Why Your Lender Matters More Than You Think

An investor's ROI can depend as much on their mortgage company as their property‚ because loan terms and availability can minimize up front costs‚ maximize returns and eliminate surprises․

Here are the highest-rated mortgage lenders across the Southeast that landlords use to finance rental properties․

1․ Assurance Financial

Assurance Financial is one of the top-rated Atlanta mortgage lenders, thanks to its streamlined process and online application technology. In-house processing of loans may provide efficiency and speed to investors on tight deadlines․ A larger selection of loans‚ including FHA‚ VA‚ construction‚ jumbo, and non-QM loans‚ may attract landlords with different financial profiles․

2․ Movement Mortgage

Based in South Carolina‚ Movement Mortgage positions itself as a fast and transparent lender with a simplified underwriting process for competitive properties․ The organization is known for its strong customer service record and wide selection of loan products.

3․ Ameris Bank

Ameris Bank is a good option for investors with a presence in Georgia and Florida, given its regional presence in both states. It's also convenient for those who prefer a bank with mortgage and general banking services․

4․ Fairway Independent Mortgage Corporation

Because Fairway Independent Mortgage Corporation provides a broad range of loan options in Alabama and elsewhere‚ it may be a good choice for borrowers looking for diverse loan services and strong customer service among top-rated mortgage lenders․

5․ Florida Capital Bank Mortgage

Florida Capital Bank Mortgage caters to local lending markets in Florida․ As such‚ Florida Capital Bank Mortgage may help borrowers with funding their investment goals through its knowledge of local pricing and property conditions․

Making the Numbers Work

Running rental ROI calculations ahead of purchasing a property separates hope from reality․ It allows investors to turn a property into an opportunity with quantifiable potential‚ and gives landlords the confidence to seal a deal with due diligence and good lending options․

Evelyn Long is a writer that specializes in housing market trends. She is also the editor-in-chief of Renovated Magazine, where she writes essential resources for renters and homeowners. She has contributed to several other publications like the National Association of Realtors and Realty Executives.