Every investor wants to earn as much Return on Investment (ROI) as possible, and understanding how to calculate your earnings is a necessary step in successful investing. Usually, you’ll find ROI expressed as a percentage or a ratio, and while it seems like it should be a matter of simple math to calculate what you’re earning on your investment property, there are several variables that can make analyzing your returns and profits a bit complicated.
When you want to keep it simple, you can divide the amount you’ve earned by the cost of acquiring your asset. That shows you the base ROI.
Earnings / Cost = ROI
The length of your mortgage loan will impact your ROI, as will your cash purchase. Today, we’re providing a high level overview of calculating your ROI, and we’re also sharing a couple of our best ideas for maximizing what you earn.
Remember that you’re investing in Santa Cruz, which is one of the most desirable places to live in the country. We have high rents but we also have high home prices. Your long term ROI is going to be the number you want to focus on rather than your immediate cash flow.
Evaluate Santa Cruz Rental ROI
The amount of ROI you’re calculating depends on the Santa Cruz rental market, and that’s because your earnings will depend on how much rent you can charge and how long your property might be vacant during turnovers.
Other factors that impact your ROI are location and financing. If you paid cash for your investment, the return you earn will be more nuanced than if you have a mortgage, in which case the amount of interest you pay will be considered in your calculations.
ROI Calculation Formulas
Your first step in determining your ROI is to look at your annual rental income. Perhaps you’re renting out a property for $2,500 per month or $30,000 annually. That’s your income.
To figure out the profit you’ve earned, subtract all the expenses associated with your rental property. This would include fixed expenses like mortgage payments, taxes, insurance, and any HOA or condo fees. Then, there are other variable costs to consider like maintenance and vacancy or maybe marketing and leasing fees.
The number that remains gives you a general idea of what you’re earning in cash flow. That’s going to contribute to your ROI but remember what really matters is that you’re gaining equity from year to year and at the same time, your asset is appreciating in value. Quantifying that will depend on your home value, which has likely risen.
Increasing ROI for Better Santa Cruz Investment Income
To increase your ROI, you’ll want to avoid vacancy and turnover costs. You’ll want to find a tenant who pays rent on time and takes care of your home. You’ll want to keep the property well-maintained so there aren’t a lot of expensive emergency maintenance costs.
As you’re calculating your ROI, remember that success looks different to every investor. Consult your own unique investment goals and let those, rather than some random target number, be your guide in evaluating ROI metrics.
Working with a professional Santa Cruz property management company can positively affect your ROI. Property managers know how to help you earn more and spend less. We’d be happy to talk more about your investment plans and potential. Contact us at Real Estate Eight Three One.