For real estate investors, a healthy return on investment is one of the main reasons to buy and rent out property. The money you earn on your investment property will show up in a number of different ways. There will be cash flow and rental income, tax benefits and depreciation, and the growing appreciation as your rental income pays down your mortgage and the value of your property increases.
When you actually begin to feel like you’re earning money will depend on a number of things, specifically the market and the amount of rent you’re able to charge. Vacancy and large repairs will hold back your return on investment gains, but higher rents and long term tenants will improve it.
Here are a few ways to find the ROI you’re looking for.
Capital Appreciation and Increasing Value
Most investors don’t start earning money in the first month that they own a rental property. Usually, the amount of rent you collect will not exceed the expenses associated with the rental property.
Instead, you’ll earn 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. Green Bay real estate values will increase, and so will your appreciation and ROI.
Earn More ROI Quickly with Improvements and Upgrades
You can earn more on your investment property when it’s well-maintained, modern, and attractive to high quality tenants. If your kitchen has appliances that are 40 years old and your bathroom floors are linoleum from the 1970s, you’re probably losing good tenants. 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.
Depreciation and Tax Benefits Impact ROI
Your ROI is about more than the money you’re earning. You’ll see a return just by taking advantage of tax breaks and depreciation.
You’ll need to declare all the income you earn off your rental property, but you can offset that income with any expenses related to your rental home. These may include:
Legal and accounting fees
Property management fees
Any travel expenses related to visits you made to your property
There are several others, and we encourage you to speak with your CPA or tax accountant to get an idea of what you should be deducting to limit your tax liability.
Depreciation allows you to deduct the investment and purchase costs of your rental property. Even better, you get to take this depreciation over the life of the investment instead of just in the year you purchase it. Currently the IRS has an average lifespan of 27.5 years on record for a home, so that’s the number you’ll use in your tax planning.
We can help you identify the return on your investment property in Green Bay. We can also help you manage your expectations if you’re preparing to rent out a home for the first time. Contact us at Blue Frog Property Management.