Investing in a rental property is amongst the best ways to maximize the return of investment. And above all, most people in Canada invest in real estate to generate their passive income. When done appropriately, investing in single family apartments, homes, condos or multi family homes could be very beneficial.
Finding rental accommodation in Canada is one of the first things any newcomer would tick off in their to-do list. Depending on the location and the apartment size you could pitch a decent rent to the tenants.This isn’t just the formula to maximize the ROI for a rental property, the amount you pitch and the amount you get makes a big difference. So let’s make a note to increase your wealth from your investment property. Starting from scratch leaving behind no room for a guilt decision, let’s first draw a rough outline on ROI.
A Quick Overview of ROI
ROI is a metric that real estate investors usually use to assess the advantage of the rental unit. The ROI on the rental unit is measured by dividing the gross profit earned through an investment by the costs obtained.
Here is the formula of ROI. Let’s have a quick look at it so that the concept gets clearer.
For example, suppose you bought a single family house at $180,000 in cash. You spent $20,000 on repairing the house and $1,000 is your closing costs. This means that the complete amount invested in the property is $201,000.
If the rent you have collected each month is $1,500. And after a year, assuming a complete occupancy rate, you have made $18,000 in your rental income. The yearly costs obtained (property taxes, insurance, water bills, etc.) are added up to $2,400. Thus, the return on investment property will be:
($18,000 – $2,400) ÷ $201,000 = 0.077 or 7.7%
After understanding the ROI formula, below we have listed some quick tricks to increase the ROI on your rental real estate investment.
Best Ways to Increase ROI on Your Rental Property
Renovate the Rental Unit
Making major or minor renovations from time to time before welcoming your new tenants always helps increase ROI on your rental unit. Timely renovation always attracts high paying tenants because the property looks new and people usually wills to pay more for such rental properties.
The renovation makes your property stand out from the competition. Here are some ideas to help you increase your return on the investment property.
- Add more space – Adding more space to your rental property is the best way to maximise its ROI. You can keep an open space besides the extra bedroom or spacious kitchen. Else, you can expand the existing room by withdrawing the walls.
- Improve the flooring – A new-looking shiny floor attracts anyone seeking a rental home. Therefore, you can upgrade the flooring to concrete, tile, laminate or hardwood. Simultaneously, you can invest a little in good quality carpet to maximize return on investment.
- Upgrade appliances – Make sure that the appliances in the house are all up-to-date. This includes the smoke detectors, carbon monoxide detectors, refrigerators, HVAC system, and generators.
- Landscaping – Curb appeal plays a key role in defining the value of the rental property. You can enhance the landscaping by keeping the exterior clean, planting trees and flowers, including outside furniture, installing a custom porch, providing the parking area and adding exterior lighting. This all attracts the tenants and makes it tough for them to leave the property. heir long yet regular stay plays a vital role in increasing the ROI of your rental real estate investment.
The world is going digital and so you should. People are active on social media and promoting your rental property on the internet sources can bring you, potential tenants, within no time. You can also advertise your rental unit on the MLS (multiple listing service) or on some reliable real estate websites.
Apart from this, you can also detail the uniqueness of your property and its location to attract genuine seekers. Along with the uniqueness, you should also point out the available amenities in addition to some descriptive and professional photographs of your property. The photographs must cover all the rooms, hall, bathroom, kitchen, balcony, exterior, and parking area.
Therefore, make sure your rental unit is clean and tidy because photographs attract more than the description. Effective advertising boosts the occupancy rate and helps in maximizing the ROI.
Screen Potential Tenants
Punctual tenants are hard to find in today’s times. So below are some lease terms that could cast a caring eye on your rental property which is indeed to increase its ROI.
Therefore, to get such tenants, you would require your tenants to have a thorough screening process. Here is a list of things you must consider while screening:
- Income – As a landlord, the very first thing you would expect from your tenant is that they could actually afford the rent you have pitched. So you can ask your tenants for pay stubs to cross check the potential renter’s earnings.
- Credit history – You can check the credit history of your potential tenant before handing over your rental property. The credit history will reveal the debt of the tenant and their history of transactions.
- Criminal background – It’s always important to check on a criminal background of the tenant to avoid further issues as it could be a red flag when screening a potential tenant.
- Previous landlords – Get in touch with the previous landlords of the tenants to check the history of late payments or damage that might get you worried.
Encourage Tenants to Stay a Bit Longer
When you find good tenants who are financially stable and possess a good background, you must try to retain them for a bit longer. You must be thinking, how a longer staying tenant could make a difference in the ROI, right? But it does, because it minimizes the vacancy rate of your rental unit which brings in a monthly cash flow without any hurdle. The regular monthly cash flow helps in increasing the ROI.
You can make your tenants stay longer by simply signing a long term lease with them, somewhere between 12, 18 or 24 months. Moreover, you can soften the deal by offering your tenants an attractive discount like releasing the half month security deposit or a month free of rent.
It’s Your Turn
Following the above-discussed methods will assist in maximizing the ROI of your rental property. You can apply different strategies on 2–bedroom apartments for rent or on condos for rent to maximize your ROI on real estate properties.
The houses for rent not only improve your ROI but also assures you a positive monthly cash flow in the long-term. You can buy a 3-bedroom house for rent or a single family condos for rent to start a passive income with your long term rental business.
Justifying the popular phrase you can maximize the rental return by improving the first impression of your rental unit. After covering the exterior, work on the inside house by refreshing the bathroom, kitchen makeover, facilitating the street parking, adding storage, and providing the outdoor fun place.
Usually the ROI above 10 percent is considered good for the rental unit. But in other cases the ROI between 5 percent to 10 percent also comes under an acceptable range. Always remember there is no right or wrong calculation in ROI as every investor entertains different levels of risk. For this reason, knowing the budget in advance and analyzing the potential return is always important.
First of all, buy a good property and enhance it’s curb appeal. You can put your property on rent and could charge a decent amount for it. You can increase the value of your property by maintaining it in and out on a regular basis under lower expenses.
The approx rate of return on a rental unit is around 10 per cent. Similarly, the average return of investment on a commercial property is around 9.5 per cent.
The 1 percent rule of real estate investing measures the price of the investment real estate against the net income it will generate. And as per the 1 percent rule, the monthly rent must be equalized or should not go below 1 percent of the purchase price.