Understanding Rental Property ROI Beyond Monthly Cash Flow
As a rental property owner in the CSRA, you know the process… Collect rent, pay management expenses, insurance, taxes, and schedule maintenance. After all of these expenses, you may be thinking, did my rental actually make any money this month? Looking at only one month of income and expenses can make your property’s performance look disappointing. While these numbers still matter, they do not tell the entire story. Rental property ROI can also be influenced by equity, appreciation, vacancy, capital improvements, and the property’s performance over time.
So, what should owners be looking at besides this month’s cash flow?
Monthly Cash Flow is Only One Way to Measure
While a positive cash flow is obviously desirable, looking only at a single month’s cash flow (or even just a short period in general) can create a distorted picture.
For example, an expensive HVAC repair can make one month, or even one quarter, look bad on paper. No matter how well you budget, things happen that sometimes you just do not expect. However, these types of repairs or big system replacements may be necessary and the new system should be able to serve the rental property for years to come.
What Else Affects Rental Property ROI?
Monthly cash flow may be the easiest number to see, but it is not the only factor that can influence your property’s overall return. Equity, appreciation, maintenance costs, and vacancy can all play a role in how your investment performs over time.
Equity Can Be Part of Your Rental Property ROI
If your property is financed, mortgage payments may gradually reduce the principal balance. As that balance decreases, the owner’s equity in the property may increase. Although, that return does not appear as monthly cash flow.
Just remember that not every part of your mortgage payment goes towards equity. Interest, taxes, insurance, and other factors all vary per property.
Property Appreciation Affects Long-Term Returns
While your equity increases, you also need to consider the fact that your property value may be increasing at the same time.
Real estate values can rise or fall over time based on market conditions, location, property condition, and changes in the surrounding area. New schools, shopping centers, major employers, development, and other changes within a community can all influence long-term property values. Of course, appreciation is never guaranteed, which is why it should be viewed as one part of the property’s overall performance rather than an expected return.
Maintenance and Capital Improvements Are Also Part of the Equation
Now remember, you also have to do your own part to protect your ROI. Maintenance and capital improvements are huge.
The older your home is, the more frequently it will need repairs and improvements to remain competitive with the current market. Having an older property is fine, especially in a place like Augusta, GA. But you have to know what to expect. Many recommend saving 50 percent of what you charge for rent as your operating expense, or maintenance budget. Even if you do not use all of the money for a month or two, save it, because it will come in handy when you need it!
Maintaining your property’s condition is part of protecting the asset and keeping it rentable.
Vacancy and Turnover Affect the Bigger Picture
A property can command fantastic rent when occupied but experience frequent or extended vacancies. What good does this do for you as the owner?
If you are just beginning your rental property investment journey, it helps to understand local vacancy rates and tenant demand. Charging more rent does not necessarily mean earning a better return if the higher price causes the property to sit vacant longer. Extended vacancies and short-term tenants can mean more turnover costs for the owner. Turnover can mean more than lost rent. Owners may also spend time and money on cleaning, repairs, marketing, and other expenses that continue while the property is vacant.
An owner getting slightly less rent with a reliable long-term tenant may sometimes have a different overall return than an owner constantly chasing the highest possible rent while experiencing more turnover.
Look at Rental Property Performance Over Time
Ultimately, one expensive repair does not necessarily make a property a bad investment. Similarly, one profitable month does not automatically make a property a great investment.
Do not judge your long-term investment entirely by what did I make this month? Instead, set aside time periodically to step back and consider your income, expenses, any vacancies, equity, property value, and capital improvements. What does your long-term performance look like? This can give you a clearer picture of the property’s performance and where adjustments may be needed.
How Property Management Helps Owners See the Bigger Picture
A professional property manager can provide visibility into things owners need to evaluate performance. This includes your rental income, maintenance history, vacancy statistics, tenant turnover, market rent, property condition, upcoming needs, and so much more. Good property management gives owners better information to make investment decisions.
Monthly cash flow matters. It helps owners understand whether rental income is covering the ongoing costs of operating the property. But, it should not be the only number used to judge an investment. Looking at equity, property value, maintenance expenses, vacancy, capital improvements, and long-term performance can provide a more complete picture of rental property ROI.
If you own a rental property in Augusta, Evans, or the surrounding CSRA, Sherman & Hemstreet can help you manage the day-to-day details that contribute to your property’s long-term performance. Contact our property management team to learn more.