Investing in a rental property can be a fantastic way to secure your financial future, but it's important to make sure that you're getting a solid return on your investment (ROI). In this blog, we will teach you how to calculate ROI on your Durham real estate rental unit. Once you know how to do this, you will be able to make sound decisions about whether or not investing in a rental is right for you!
What is ROI with real estate anyway?
ROI, or return on investment, is a calculation that investors use to determine whether a particular investment is worth their time and money. In the context of real estate, ROI measures how much money you earn in relation to how much money you put in. There are a few different ways to calculate ROI when it comes to real estate, but we'll focus on two of the most common methods: Capitalization Rate and Cash-on-Cash.
Capitalization rate
To calculate your capitalization rate, you simply take your annual rental income and divide it by the purchase price of the property you chose among Durham homes for sale. For example, let's say you purchased a property for $200,000, and it generates $30,000 in rental income each year. Your capitalization rate would be $30,000/$200,000, or 0.15.
Okay, but I haven't owned the property for a year yet, how do I estimate my rate?
The easiest way to estimate your annual rental income is to take the amount you plan to charge and multiply it by 12 months, then subtract any known expenses. For example, if you plan to charge $2000/month in rent and you expect your expenses to be about $400/month, your annual rental income would be $24,000-$4800, or $19,200. Known expenses may include things like property taxes, insurance, and repair/maintenance costs.
Cash-on-cash return
To calculate your cash-on-cash return, you take your annual rental income on Durham real estate and subtract your annual expenses (mortgage payments, property taxes, insurance, etc.), then divide that number by your total cash investment.
For example, let's say you purchased a property among Durham homes for sale for $200,000 with a 20% down payment ($40,000). Your annual mortgage payments would be $12,000 (assuming a 30-year loan at a fixed rate of interest), and your other annual expenses (taxes, insurance, etc.) add up to $10,000, meaning your annual cash flow from rental income would be $8,000 ($30,000 in rental income - $12,000 in mortgage payments - $10,000 in other expenses).
Now let's say you want to calculate your cash-on-cash return for the first year on your Durham real estate. You would take your annual cash flow ($8,000) and divide it by your total cash investment ($40,000), which would give you a return of 20%.
Other considerations
As you can see, calculating ROI on your rental is relatively simple once you know the formula. However, there are a few things to keep in mind when using this calculation.
First, your ROI will change over time as your rental income, expenses, and mortgage payments change. For example, if you raise the rent on your property or pay off your mortgage, your ROI will increase. Alternatively, if you have a lot of repairs to make in one year, your ROI for that year may be lower.
Second, your ROI is only one factor to consider when making a decision about whether or not to invest in Durham real estate. You also need to factor in things like the location of the property, the condition of the property, and your personal goals for the investment.
But what about Durham real estate specifically?
A great source for learning about current trends in rental income for property purchased among Durham homes for sale is Zumper.com, which tracks rental prices across properties based on the number of bedrooms. For more accurate comparable rental income, consult with a local real estate agent.
If you are interested in purchasing a studio apartment among Durham homes for sale to use as a rental property, the 2022 median monthly rent is $1,588, which is up 14% from April 2021, equating to an increase of $199 in monthly rent from 2021. Based on the current median rent for a studio apartment, you can expect to receive $19056 in rental income from your tenants over the course of the first year.
As for 1-bedroom Durham real estate, the median monthly rent increased 15% to $1,279 from this time last year, which is a change of $165. Based on the current median rent, you can expect to receive $15,348 in rental income for the first year.
Durham homes for sale with 2 bedrooms can bring in a current median monthly rent of $1,550, which is 17% higher than this time last year. This equates to an increase of $225 in monthly rent from last year. Based on the current median rent, you can expect to receive $18,600 the first year.
Durham real estate with 3 bedrooms is bringing in $1,888 in current median monthly rent, which is 16%, or $263, higher than this time last year. With the current median, you can expect to receive $22,656 in rental income in the first year.
Finally, for Durham homes for sale with 4 bedrooms, the current median monthly rent is $2,250, which is an increase of $373, or 20%, from this time last year. Based on the current median, you can expect to receive $27,000 the first year.
With the current median statistics, you can estimate your ROI for the first year based on your intended purchase price and the formulas presented earlier. If you're thinking about investing in rentals for income, be sure to do your research and calculate your potential return before making a final decision!
Invest in Durham real estate
Now that you know how to calculate ROI on your rental income property, you can use this information to make sound decisions about whether or not investing in a rental is right for you! Just remember to take into account all of the factors involved, including your personal goals for the investment. With a little research and number crunching, you'll be on your way to becoming a savvy real estate investor in no time! If you are interested in Durham homes for sale, reach out to Welcome Home 919 Realty Group for assistance navigating the Durham real estate market.
