Part of becoming a successful landlord in Annapolis is making your rental property more valuable through renovations and upgrades.
This will not only help you justify asking for higher monthly rent rates, but allow your property management company to place higher quality tenants in your property.
Adding to that, renovations are known to increase your property’s resale value should you decide to sell your property in the future.
Lastly, performing the right renovations on your rental property will increase your overall return on investment (ROI), so you can profit more, and possibly pay off your mortgage quicker.
Understanding your rental property’s ROI will help you understand how well your property portfolio is working for you. That’s why it is crucial to know which renovations will generate a high ROI.
Knowing this will keep you from dipping into your profits and renovating something that will end up hurting you financially in the long run.
Today we are going to look at what ROI is, how to calculate it for your Annapolis rental property, and the ways in which the most common property renovations can help boost your ROI.
What is ROI?
Return on investment (ROI) is a metric used by real estate professionals to estimate the performance of an investment property.
In short, your property’s ROI will reveal how profitable your property is.
ROI is calculated by dividing the net profit of your investment by the amount of money invested thus far. The end result is then expressed as a percentage or ratio of how much return on your original investment you are making as a profit.
Calculating Your Annapolis Rental Property’s ROI
To calculate your rental property’s ROI, follow these simple steps:
- Calculate your rental property’s total annual rental income
- Subtract all expenses (this is considered your annual cash flow)
- Add any equity you have to build your annual cash flow (this is considered 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.
Ways to Increase Your Rental Property ROI
If you are looking to boost your rental property’s ROI (and thus your positive cash flow), consider investing in some of the following renovations.
1. New Roof
In the past, we have discussed the importance of having a basic understanding about your rental property’s roof, including how to assess it for damage and make the appropriate repairs.
This is not only for the safety and convenience of your current tenants, but for aesthetic appeal as well.
One of the first things anyone will notice when they visit your property is the exterior of the property, and that includes the roof.
Curb appeal is one of the best ways to entice potential tenants to lease from you. The better the exterior of your property looks, the higher you can charge when it comes to the monthly rent.
Speaking of exterior appeal, the way both the front and back yards of your rental property are landscaped will significantly influence how much you can ask for in monthly rent rates.
If you are looking to increase the value of your property’s landscaping, in an effort to boost ROI, consider the following renovations:
- Add flowers, shrubs, and trees for added visual appeal and shade
- Install a custom walkway, deck, or porch
- Consider investing in a pool or hot tub
- Design an outside kitchen area, complete with BBQ and food prep station
- Include outside furniture such as lawn chairs and a table set
- Add exterior lighting so tenants can enjoy the evenings outside
Many prospective tenants place a lot of emphasis on what they want to see in a rental property’s landscaping, whether it be in the front or back yards.
And, since some of these upgrades are relatively inexpensive, most landlords will have no problem adding a few exterior landscaping renovations to their rental property in an effort to get more return on their investment.
3. Flooring Upgrades
The flooring in your rental property is the one thing your tenants will make the most use out of while leasing from you.
And, while it can be tempting to place the cheapest carpet possible throughout your rental as a way to reduce costs due to natural wear and tear, there are some affordable and much more effective options that will also add to the value of your rental.
Take the time to research what kind of flooring you want to upgrade to – hardwood, tile, higher quality carpet, laminate, concrete, or vinyl – before spending any money.
But remember, no matter which style you go with, a newly upgraded floor throughout your rental is sure to garner you a higher ROI immediately.
New floors are sturdier, better looking, more functional, and more appealing to anyone looking to lease a rental home.
4. Additional Square Footage
Adding more space to your Annapolis rental property is one of the best ways to increase the value of your investment.
This is especially true if you own property in a competitive housing market.
Consider adding an additional bedroom, sunroom, basement or attic, or even just opening up an existing room by removing a wall that is taking up space.
Additional square footage can help in a variety of ways. It makes for a larger living space, allows for additional family members or roommates to live with your tenants, and even gives those that work from home a way to enjoy a dedicated workspace.
No matter what you do, expect the value of your property to jump and your rent rates to increase accordingly if you renovate your property to have additional square footage.
5. Green Appliances
With more people looking to do their part when it comes to helping the environment, renovating your rental property to be more eco-friendly is an excellent way to increase the value of your property.
Things such as green appliances are not only appealing to those looking to make a difference in the world (which drives tenant competition up), they also help lower your tenant’s power bills – which is always a bonus amongst those looking to rent.
What’s better, there are plenty of incentives offered by states and cities to help offset the cost of going green in your rental.
This means even more savings for you, happier tenants, and a higher ROI.
Renovating your Annapolis income property to increase your return on investment is always a good idea if your budget allows for it. Especially because after the upgrades are successfully finished, you will be able to instantly recover all of the costs you put into them.
If you are in need of a high quality property management in Annapolis company to help you with things like rent rates, good renovation ideas, and placing high quality tenants in your property that will pay what your investment is worth, contact Bay Management Group today.
We can help you determine which renovations will generate a ROI boost, steer you clear of upgrades that do not make financial sense, and make sure you keep your rent at a reasonable and competitive rate.