Improving or renovating your rental property is a great way to boost overall return on investment. Thus, not only helping to justify higher monthly rates but allow you to place higher quality tenants in your property. Furthermore, thoughtful upgrades can increase your property’s resale value.
Understanding your rental property’s ROI will help you evaluate how well your rental portfolio is working for you. This information is essential to deciding whether investing in some property upgrades is a worthwhile choice. Join us below as we look at what ROI is, how to calculate it, and the top 5 renovations to help boost your return on investment.
What is ROI?
Return on investment (ROI) is a key performance indicator that real estate professionals use to estimate the performance of an investment property. So, in short, your property’s ROI will reveal how profitable your property is against the total expenditure.
Boosting ROI vs. Adding Value
ROI is the percentage of value gained on the investment. Essentially, measuring profit against how much the property costs. However, adding value refers to boosting the rental rate potential through improvements and upgrades. Both factors go hand in hand, for example –
Let’s say an investor decides to redo the master bath to add $5,000 of value to the property. That sounds like a worthwhile idea. However, if the renovation cost to add that value is $8,000, the investor has a negative ROI. While not every investment will have a 100% or more return, these numbers all must factor into your decision to upgrade your property.
How to Calculate Your Rental Property’s ROI
ROI is calculated by dividing the net profit of your investment by the amount of money invested thus far. The result is then expressed as a percentage or ratio of how much return on your original investment you are making as a profit.
Steps to Calculate Rental ROI
- Calculate your rental property’s total annual rental income
- Subtract all expenses to get your annual cash flow
- Add any equity you have to build your annual cash flow, which determines your net income
- Divide your net income by your total investment to get the ROI
For instance, let’s say you purchase an Annapolis investment property for $100,000. You charge $800 a month in rent, spend $200 a month on expenses, and have zero equity built up.
- Here’s the calculation: $800 rent – $200 in expenses = $600/month cash flow ($7,200 annually).
- With zero equity built-in, your ROI becomes $7,200/$100,000 = .072, or 7.2%.
Of course, things become more complex when you have built up equity and you have financed your rental. Luckily, there are plenty of online ROI calculators to help you with the calculations. Though there is no exact number to aim for, in general, you should hope for an ROI between 6% – 10% (or higher) to truly know your investment is working for you, not against you.
5 Ways to Increase Your Rental Property’s ROI
As a rental property owner, periodic upgrades are essential to maintaining positive cash flow and attracting high-quality tenants. Therefore, if you are looking to boost your rental property’s ROI, check out these suggestions for increasing ROI below –
- Invest in a New Roof
- Boost Curb Appeal
- Upgrade the Flooring
- Add Square Footage
- Focus on Going Green
1. Invest In A New Roof
While a new roof will not draw the attention of something like a kitchen renovation, it is equally important. In the past, we have discussed the importance of having a basic understanding of your rental property’s roof, including how to assess it for damage and make the appropriate repairs. After all, nothing ruins you or your tenant’s day faster than a water leak from a dilapidated or poorly maintained roof. Nowadays, roofing comes in various materials, colors, and styles that provide both functionality and curb appeal!
2. Boost Curb Appeal
The aesthetic of your rental property makes a lasting first impression for renters and can influence monthly rent rates.
So, if your property needs a spruce up to boost ROI, consider the following renovations –
- Add colorful and hardy native flowers, shrubs, or trees
- Install a custom walkway, deck, or patio
- Include outside furniture such as lawn chairs and a table set
- Add simple but effective exterior lighting so tenants can enjoy the evenings outside
- Power wash exterior siding or foundation
One of the best ways to ensure healthy and sustainable landscaping is through native plants. The Maryland Native Plant Society offers lists of suitable plants along with landscaping tips to keep your yard looking great all year long.
3. Upgrade the Flooring
Flooring, like walls, in a rental property can take a beating. It is also one of the first things any tenant or buyer notices about the home. While it can be tempting to use carpet throughout your rental to reduce costs, there are some affordable and much more effective options that also add value. Take the time to research what kind of flooring might work best for you – hardwood, tile, higher quality carpet, laminate, concrete, or vinyl.
But remember, no matter which style you go with, a newly upgraded floor throughout your rental is sure to garner a higher ROI. New floors are sturdier, better looking, more functional, and more appealing to anyone looking to lease a rental home. One way to achieve upgraded flooring and mitigate costs is to be selective with where you invest the money. For example, why not upgrade to laminate throughout the living spaces but use carpeting in bedrooms where traffic and wear are generally less? This is a great way to achieve an economic result.
4. Add Square Footage
The COVID pandemic saw many renters spending more time than ever in their rental homes. Whether it was finding a corner for schoolwork or trying to carve out space for a home office, space is in demand. Therefore, adding more space to your rental property is one of the best ways to increase the value of your investment.
For example, consider adding a bedroom, sunroom, or finishing a basement or attic space. Before taking on a larger renovation like this one, check the pulse of the local market. Look for other units on the market with the extra space you plan to offer, such as a finished basement, and see what rental rates these properties fetch. However, whether you choose to take on a full-scale renovation or convert an existing space by adding or removing a wall, tenants will appreciate the extra space.
5. Focus on Going Green
Energy efficiency is the goal of owners and tenants alike. In addition to helping the environment, saving on utility bills is a huge plus to making some simple green upgrades. Going green in a rental property is possible in many ways, and not all will require a significant investment. Check out these suggestions below –
- Seal gaps around windows and doorways to increase energy efficiency
- Add insulation to the attic
- Swap out old incandescent bulbs to efficient and long-lasting LED models
- Install low-flow fixtures such as toilets or showerheads
- Replace old or inefficient windows
- Upgrade the appliances
- Consider adding solar panels through a local energy program.
Tips for Boosting Your Rental Property ROI Through improvements
Boosting ROI relies on keeping costs in check while achieving maximum results. To help meet these goals, check out a few suggestions below –
- Initially Buy Fixer-Uppers – Purchasing a fixer-upper for a great deal offers more room to make smart upgrades for the most impact. Units in dire need of renovations present an opportunity for investors and the chance to create equity through necessary updates.
- Embrace a DIY Attitude – Getting your hands dirty is a great way to save money and complete simple upgrades to boost ROI. Even with little experience, owners can paint, swap out cabinet doors, or change simple plumbing or light fixtures. Nowadays, resources like YouTube offer easy step-by-step videos to help you through simple projects. This allows your contractors to focus on larger, more complex renovation tasks more efficiently.
- Build Relationships with Vendors – Part of being a successful landlord is building relationships with key vendors. So, research professionals in a variety of niches and get several estimates for any larger jobs. Creating these contacts will help ensure you have someone there when you need them and could lead to volume discounts or savings in the long run.
Maximize Your Investment Through Professional Rental Management
Renovating your income property to increase return on investment is always a good idea if your budget allows it. However, understanding the local market rates and competition is an important part of the equation. After all, one of the most detrimental things an investor can do is over upgrade in a market that cannot support the rate needed to achieve a high ROI. That said, investing in your rentals goes beyond simply upgrading the property.
Successful rental owners know that professional property management is an investment in your business that helps to maximize its potential. Bay Property Management Group is the area’s leading source for property managers in Annapolis and throughout central Maryland. Our experienced team uses their local market knowledge to effectively market and efficiently manage properties for our clients. If you would like to know how full-service management can add value to your business, contact Bay Property Management Group today.