Assessing the ROI of Residential Real Estate Investments: Factors to Consider
Investing in residential real estate is one of the best ways to make money while using a portion of it to pay off the property renters are currently living in. Housing is one of the parts of life that everyone needs, so offering it for rent lets you help your community while still making some money.
These are the factors to consider if you’re looking at getting into real estate, and why this investment is one more people should consider making.
Residential Real Estate Has Been a Rollercoaster
It’s no secret that residential real estate has been on a wild ride for the last two to three years. Things are slowing down now: but the news most overlooked is how high rental prices went. Although property values have slowed down, rent is still rising. This means you have a chance to buy into a market that’s actively offering growth.
The average property in Phoenix as of May of 2023 has seen a 5% increase in rent over the last year, which is much higher than the property value growth of 3% the same area has seen. Although there’s always a chance these numbers could flip in the future, so far, the market hasn’t been showing any sign of this happening.
How to Pick the Market You’d Land In
One of the best markets to land in is the Phoenix, Arizona, market. The smaller cities surrounding this massive area are increasing in value with it, which means you have a lot of real estate to pick from.
When you pick your market, pay attention to the area of town you’re in. Is there current development and jobs there? What’s the unemployment rate? What maintenance or upgrades like permeable paving systems will you have to take care of? Keeping an eye on these factors will help you find something that will have plenty of tenants excited to rent from you.
Property Costs Are Slowing Down But Not Dropping
In 2020, 2021, and the first half of 2022, property values were skyrocketing. Although they’ve slowed down to a crawl: the prices haven’t dropped. This is awesome for residential real estate investors who are worried about buying right. The slowdown means your houses will continue to gain value, and it’s just important that you hold onto them so they don’t drop again.
Is Renting Out Property Still Profitable?
Renting is still profitable! The longer you own a property, the more money you can make off of it. This is true not only because the mortgage will stay the same while the rent increases but also because the value of the property itself increases, so when you eventually sell it, you can make a large profit.
Over a third of Americans currently rent, which means you have a large market to advertise and rent to.
Finding Good Tenants and Maintenance Matters
Although it would be awesome if you never had to deal with maintenance or issues with tenants, they come up extremely often. It’s vital that you hire maintenance workers who know what they’re doing and are respectful of the tenants. It’s of paramount importance that you carefully vet your renters and ask for references while keeping a close eye on their background checks.
Like impact-resistant shingles, finding a good tenant could save you thousands in the long term since you won’t have to struggle with turnover or property damage. Make sure to find someone who will fit your property perfectly.
How to Calculate Cash Flow
In a perfect world, your profit would be entirely calculated by how much you’re charging for rent and what your mortgage is set at. Unfortunately, it’s more than that. The average Arizona homeowner spends around $1,116 a month on house payments, while the average rent payment is closer to $1,550. If we left it at that, you’d be making $434 a month from each property, but there’s more than that.
You need to calculate how much you spend on advertising, the cost of turnover when you have a tenant leave, the cost of maintenance, and even property tax. That $434 starts looking a lot smaller.
Thankfully, after the property is paid off, you have a free property and are making a pure profit.
What Work Does the Average Property Need?
Every property is different, but it’s vital to stop and consider what you’ll have to budget for when you’re buying. Weighing the costs of aluminum vs. vinyl siding is a great place to start, but when you’re buying, it’s a good idea to also consider the age of the roof, what the floors look like, and what other work needs to be done.
The most important thing to consider is what you can afford to do and how much this will increase what you can charge for rent to pay for the work done.
Anyone Can Make it Big If They Invest Intelligently.
Investing intelligently takes patience, a keen understanding of the market you’re in, and enough capital to handle the risk. Although there are countless ways to make money: investing in residential real estate is one of the best calls to make.
Brian Jeffries is a freelance writer that loves sharing his knowledge and expertise on construction projects and materials. He lives in Winter Park, Florida where he enjoys spending time with his wife and working on projects in his spare time. Brian’s work as a freelance writer can be found on Building Product Advisor, a construction industry resource site.
