Whether you’re a new investor or an experienced real estate investor, you’re likely wondering when you can expect to see a return on your investment (ROI). When will you know you’re making money?
The question does not have a single answer, unfortunately. It really depends on what you buy, how you buy it, and what you’re doing with the property. A single-family rental home that was purchased in cash will earn you returns in a different way than a multi-family building that has four units and was financed.
Your ROI depends on the income you’re earning, the money you’re spending on that investment, and the way you financed your property. It also depends a lot on the market and on the moves you make while you own the investment. Are you making improvements every year that will increase the value of the home? You’ll see some stronger ROI if you are. When your rents are below market and you hesitate to raise them, you’ll likely take longer to earn what you hope to earn.
It’s about strategy. Here’s what you have to keep in mind when you’re calculating when you can expect to see a healthy return on your investment property.
Set Some Kansas City Real Estate Investment Goals
To establish a timeframe for when you’ll really begin to see a return on your real estate investment, you have to remember why you invested in the first place.
Do you have some investment goals in place? Are you reviewing them periodically? If you don’t have any goals written down, you need to set some. This will drive what types of properties you buy and where you buy them. Some potential investment goals might cover:
- You’re investing to gain leverage and hedge against inflation. These are benefits and returns that you cannot get from the stock market. Only in real estate do you have the potential to increase what you earn with money that isn’t your own.
- You’re diversifying your financial portfolio. There are so many options with real estate investments. You can own single-family homes, multifamily properties, or a mix. You can rent out commercial space or focus on short term vacation properties.
- You’re setting goals for long term ROI. Real estate is the best investment for future earnings. You’re earning from compounded returns and investment growth. Your property values are going up and the amount of money you owe on those properties is going down.
When your rental property isn’t delivering thousands of dollars in the cash the first year, don’t get discouraged. You’re earning money. The ROI is still there.
Buying and Holding Delivers the Best ROI
There are some investors who build their portfolio around buying homes and then flipping them. This can be a great way to earn money in some real estate markets. It’s hard to do that now, and if your real estate goal is to earn some great returns over the long term, this isn’t a strategy that’s likely to help you reach those goals.
Real estate is not usually a get-rich-quick scheme. Smart investors understand that it’s a long game.
We recommend that you buy and hold your real estate investments. Prepare yourself to make more money over time. You’ll earn a bit of income with your rental payments every month. The real money, however, is made over time when rents are going higher, equity is growing, and properties are becoming more valuable.
Your real estate investment is going to make you money, especially when you have a reliable tenant in place who is paying rent and taking care of the home. You might not see a profit right now or in the next year or even in the next handful of years.
That’s okay, because ROI isn’t something that can be measured at the beginning of your investment cycle. You’ve made an investment that a tenant is helping to pay for. The longer you’re willing to hold onto that investment, the higher your returns and earnings will be.
Focus on These Metrics: Capital Appreciation and Increasing Value
Most investors in Kansas City don’t start earning money in the first months that they own a rental property. Usually, the amount of rent you collect will not exceed the expenses associated with the rental property. In some cases, it might. Maybe you paid for your investment property in cash. Or, you refinanced a property you already owned while rates were low and now you’ve moved out of it and you’re going to rent out the home.
There are plenty of scenarios in which you’ll have positive cash flow right away.
Most investors, however, will earn their ROI through capital appreciation. This is the increase of a home’s market value compared to its purchase price or acquisition cost. When you factor appreciation into your investment strategy, you’ll see that it will help you earn the income you’re hoping for as the property increases in value. Kansas City real estate values will increase, and so will your appreciation and ROI.
Focus on the Formula: Good Tenants and Great Property Condition
How can you earn maximum ROI faster? By making sure you have a fantastic rental property that’s well-located and well-maintained. A modern, functional, and attractive home will attract the high quality tenants you need to have a profitable investment experience.
One of the best and easiest ways to increase what you earn is by making some cost-effective upgrades. You’ll wait longer to see returns if your kitchen has appliances that are 20 years old. Make sure the home is clean, painted, and shows well.
If your home is new and already in great condition, don’t spend a lot on upgrades now. To really maximize your investment, you’ll want to wait until you need to begin replacing things such as floors, appliances, and fixtures. Upgrade your property during turnover periods so you can ask for higher rents. This will increase your short term income and your long term return on investment.
Your path to ROI depends on your property and your investment goals. We can help you map this out. Contact us at Key Partners Property Management.