ROI: The Importance of Property Rental Analysis

As a property owner, you always have one number on your mind: the return on investment. And there’s just no way to come up with an accurate number if you don’t understand the importance of property rental analysis.

You’ll need to round up all the right figures, combine and dissect them in all the right ways, and plug them into the big picture. You won’t have confidence in this venture’s profitability unless you crunch all the numbers.

That property rental analysis is also a critical aid in determining a competitive and fair rent. The monthly rent on any property is a nice round number, but the math that went into determining it was a far sight messier. Undercharge, and you’re losing out on profits. Overestimate, and you’ll get a bad reputation among renters.

The analyzing process can be daunting, difficult, and boring. But you are in this rental property because you want to make money. And mining data is the only way to predict a profit.

To get the whole picture, you’ll need to open up Excel and look at past years’ expenses, mortgage details, maintenance records, tax records, and cash flow statements.

There are different definitions of ROI, but among the metrics you’ll want to consider are the following:

Net Operating Income

Include taxes, maintenance, insurance, supplies, etc., while keeping the age of the property in mind. Net operating income = net income – net operation costs.

Cap Rate

This is short for “capitalization rate,” and it will show you the potential rate of return on the property. Net operating income ÷ current market value = cap rate.

Cash on Cash Return

This is where you’ll take into account the method of financing. Annual pretax cash flow ÷ total cash invested = cash on cash return.

Cash Flow

It’s simple: income – expenses = cash flow. Except those expenses can be slippery little numbers that include taxes, insurance, vacancy, repairs, utilities, association fees…you get the idea.

So what’s the only number you’re really looking for in all this? The return on investment. In addition to cash flow, you’ll examine variables such as tax advantages and disadvantages, property appreciation (or lack thereof), and equity.

Analyzing your own property is a great way to learn your investment from the inside out. It also can be extremely frustrating. If you don’t have the time or expertise to make sense of it all, a good property management company can do all the work for you with accuracy you can trust.

After all, numbers just can’t tell the whole story. Some particulars don’t fit neatly into a formula. Let’s say that you’re determining the ROI for your rental property in Winter Park, FL. Even if you are a whiz with numbers, there are countless intangible factors you may not be considering. As Winter Park transitions from its origins as a resort community to a tapestry of families, college students, retirees, and shoppers, we track the numbers for you.

Let R. Russell Properties show you the importance of a property rental analysis for your investment. For more information on rental property management in Winter Park, FL, contact us today!