Rental Property ROI

Rental Property ROI

If you’ve been thinking about purchasing rental property in the Upstate of South Carolina, but you’ve been trying to determine whether it’s really worth the effort, consider this Return on Investment (ROI) formula for a minute and hopefully it will help you when making the best decision. Upstate CREIA member Winston Rego explains rental ROI in plain English.

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There are two separate and independent returns to rental properties.

  1.  You get a cash flow return while you hold a rental property and
  2.  You get a capital gains return when you sell the property.

This article will cover the relationship between debt service, return on investment, and net income on the cash flow side. These formulas hold true whether your considering property in Greenville, Clemson, Laurens whether high end rentals, low end, student or otherwise. These formulas are standard investing formulas regardless of where you invest or what type rental property you invest in.

Many investors focus on the return on investment (“ROI”) of a property while others focus on the net income. It is important to understand how the debt service affects the ROI and the net income.

  • The ROI (also called cash on cash) is the net operating income (“NOI”) divided by the cash used to purchase the property.
  • The NOI, net operating income, is the gross income minus all the expenses except the debt service. The net income is the NOI minus the debt service.

The general rule to remember is that the less cash you put into a deal and the more you finance, the larger your rental property ROI will be. The other general rule is that the more cash you put into the deal and the less you finance the larger will be your net income. So if you want a higher ROI but lower net income, you put less cash into a deal; and if you want more net income, you put more cash into the deal and finance less.

Let us look at some examples. Let’s say you purchased a property in Greenville, SC for $100,000 and it has an NOI of $10,000.

If you purchased it using all cash, it will get a $10,000 net income, which, divided by your $100,000 cash investment, will give you a 10% ROI. In comparison, if you bought the same property with $50,000 cash and financed the purchase with a $50,000 interest-only loan at a 5% interest rate. Your net income will be $10,000 minus the $2,500 debt service, which is $7,500.

Your rental property ROI will be $7,500 divided by the $50,000 cash you put into the deal, which is 15% ROI. You can see that by putting more cash ($100,000) into the property, as in the first example, you get more net income ($10,000) as compared with the second example where you put less cash ($50,000) and got less net income ($7,500). You can also see that by putting more cash ($100,000) into the property, as in the first example, you get a lower ROI (10%) as compared with the second example where you put less cash ($50,000) and got a higher ROI (15%).

It is important to keep both the ROI and the net income in mind when analyzing a property and determining the appropriate debt service, because you want to get the highest ROI possible, but you also need sufficient net income to meet your living expenses.

Remember, Upstate South Carolina is a terrific place for steady ROI from rental property. Whether you prefer lower end rentals in the inner city or outlying areas or college rentals in Clemson, high end condos on Augusta st or on Lake Keowee.

Rental property as a form of long-term passive income and wealth growth is terrific and offers many advantages to the serious and novice investor.

This article is brought to you by the Upstate Carolina Real Estate Investors Association. (UCREIA)
Information about UCREIA’s Educational programs can be obtained off this website or by contacting the club’s Dir. of Education, Karla Kuhn

UCREIA is a non-profit club made up of volunteers who themselves are investors and are dedicated to the purpose of educating real estate investor and providing networking and business opportunities among real estate investors all over the Upstate of South Carolina.