When I’m thinking about investing in residential real estate, the first question I always ask myself is: Am I gonna make money on this thing or not? At the end of the day, that’s obviously all that matters.
Here are the simple six questions I contemplate to get an accurate idea of the renter ROI I can expect:
1) Can I Rent the Property?
If you can’t rent the property, you won’t make money, plain and simple. To determine if you can rent a property, take a look at the neighborhood it’s in. Doing your due diligence on the area can help you figure out whether or not a property can be occupied and generate the kind of income needed to sustain the property costs.
2) Is It Going To Stay Rented?
The property needs to stay rented in order to continue generating profit. You’ll lose money incredibly quickly if you’re holding a vacant property, so it is important to not only make your property attractive but also find the right tenants. This depends heavily on which types of commercial real estate investing you’re involved in, as well as your area. For some cities, apartments are a great deal, but in other places, retail spaces may be the big money-maker.
3) Is it a Good Value for the Tenant?
Tenants will only stay if you’re providing them with a good value. Before you purchase a property, look around the area for comparable spaces, and evaluate the rent. Decide if you can make a profit charging a similar rent.
4) What Are They Willing to Pay?
Willingness to pay ties in heavily with value. You may be able to get away with charging slightly higher rent if you’re in an up-and-coming neighborhood. Conversely, new tenants might not be willing to pay current rental prices if the neighborhood is less than desirable.
5) How Much Will It Cost Me ?
Figuring out how much you’ll owe the bank each month can help you make smart commercial real estate investing decisions.
6) Are My Rents Higher Than My Payments to the Bank?
Use your monthly payment and the rental rate you calculated to figure out if rent is higher than your payments. If rent is higher, you’re making money. If your payment is higher, you’re losing money.
The best ways to learn how to calculate your return on investment is to take classes, read lots of books on commercial real estate investing, and of course, subscribe to this blog. Taking the time to proactively educate yourself will help you be successful and make smart real estate investments – and will pay off big time in the long run.
P.S. – Another important factor in your return on investment is inflation. Will rents in your area keep pace with inflation? Although it won’t cost you any more to hold the property, you’ll want to invest in areas that will keep up with inflation.
