One factor savvy real estate investors look at when deciding which properties might be profitable is the rate of return on rental property (ROI on rental property). Overall, investors in rental real estate are seeing strong returns for properties with an average annual return of 9.06 percent in the third quarter, according to a recent study by real estate data provider RealtyTrac.
Daren Blomquist, vice president at RealtyTrac, described the market for single-family rental homes as solid, according to a RealtyTrac analysis of almost 600 counties. Overall, the rental market is seeing greater real estate ROI as consumers look to renting as a way to ride out hard financial times.
“In the high-risk, high-yield markets, where unemployment and vacancy rates are higher than national averages, the average return was a whopping 19 percent, actually up from a year ago thanks to a strong increase in rental rates,” Blomquist said.
Real estate markets with the greatest ROI on Rental Property
Many of the counties seeing the greatest returns in investment in the RealtyTrac study were located in Florida, with some reporting vacancy rates hovering near 5 percent and experiencing an annual gross rental yield of more than 17 percent. The counties with the lowest rental returns included some of the metropolitan areas that are known for sky-high rental rates. New York County, which includes Manhattan, and San Francisco County, had rental rates of 2.4 percent and 3.16 percent respectively in the third quarter.
In states like Florida, investors could put money toward low-priced homes that are then renovated and turned into attractive rental properties for a higher ROI. Investors looking at Jacksonville investment properties could look into working with a real estate investment firm to find the right neighborhoods to maximize their cash flow. In this way, investors could increase the chances of seeing healthy rates of return on their investments.
Single Family vs. Multifamily Real Estate Investments
In picking properties, investors should evaluate the profitability of single-family homes compared to multifamily options.
Single-family properties are often popular with young families and other tenants who want their own spaces, so investors could look into family-friendly neighborhoods filled with these property types.
The best neighborhoods within this bracket are often those with a combination of owner-occupied and rental properties. Jerry Chautin, a former commercial mortgage banker, recommended investors inspect the rental rates for similar properties in the same area to get a feel for the market.
How to Calculate ROI on Rental Property
Learn how to calculate ROI on rental property in 4 simple steps:
- Calculate your annual rental income
- Subtract your expenses from your annual rental income. This is your cash flow.
- Add your equity build to your cash flow. This is your net income.
- Divide your net income by your total investment to get your rental property return on investment.