How to Calculate the ROI on a Rental Property

How to Calculate the ROI on a Rental Property

Rental properties can be a great asset to investment portfolios, particularly if they are successfully managed. There are many different types of real properties that can be converted into rentals. Commercial properties, when fully occupied, generally pay higher dividends for investors. Residential rental properties are said to be an addictive habit because investors purchase additional rentals consistently over time. Whether an investor chooses to select commercial, residential, or other property as a rental, there are some considerations that should be carefully weighed.

The return on investment (ROI) will be greatly impacted based on a number of different factors. Investors cannot simply calculate the purchase price of the real property and the average monthly lease income for the property. Many other conditions exist and must be factored into an accurate ROI on rental property.

Taxes and Insurance

The overall ROI depends in part on the geographical location of a particular property. There are various local and state ordinances that require lot rent, property tax, school tax, and other fees to be paid by the land or property owner. These may seem minute, but they will impact the overall return on investment. This calculation can be simplified by the net income gain of the property divided by the cost of the property. Net income gain is basically the income generated minus the cost of the property. These calculations can be based on monthly or annual figures and the end result will be the same.

Maintenance and Utilities

One major area that many landowners and property managers fail to consider when calculating rental income are the essential costs associated with the building or property. Commercial properties of course entail much higher overhead costs than residential properties, but these elemental items should be considered for all types of real property. Second to required insurance, routine maintenance and repairs are among the highest expenses that property owners incur.

Maintenance and repairs on a commercial building may require certified repairs that are filed with a city or county records office. Monthly utilities such as gas, electric, water, sewer, and trash pick up are generally required whether the property is currently being rented or not. Unless these are passed along to tenants, the property owner must deduct these monthly expenses from their net return on investment.

What’s the Difference Between Net Leases?

What’s the Difference Between Net Leases?

Net leases are essentially an agreement where a tenant pays the owner of a commercial property certain expenses beyond the rent. This might include payment of insurance, maintenance or taxes pertaining to the property. There are several options, which include a single, double or triple net lease. Let’s explore how these leases are different.

Single Net Lease

A tenant that opts for a single net lease will often pay the taxes on the property, in addition to the rent. A single net lease serves the purpose of enabling the landlord to eliminate part of the risk associated with leasing a property. Although the tenant is responsible for the property taxes, they are not responsible for other expenses, such as utilities, repairs and insurance. The landlord is required to cover these costs on a single net lease.

One of the benefits of a single net lease is that the rent is usually cheaper than it would be if the taxes were not paid. This type of lease could be detrimental to the landlord because they still have the responsibility of making sure the taxes are paid on time. This means the landlord would have to pay the property taxes if the tenant does not pay them by the due date. Failure to do so will result in late fees.

Double Net Lease

Of the net lease options, the one most commonly used is the double net lease. This is where the renter is responsible for paying both insurance and taxes, as well as the monthly rent. Just like a single net lease, the rent for a double net lease is lower than the standard amount. When there is a multi-unit commercial property, landlords often divide the cost of insurance and taxes based on the square footage.

Since a double lease does not require the tenant to pay for repairs, the landlord must handle this expense whenever a problem arises that requires maintenance.

Triple Net Lease

Use of a triple net lease isn’t as common as the other options. This type of lease requires renters to pay insurance, taxes and repairs, in addition to the rent. One of the issues that can arise with a net lease is a maintenance problem that becomes too costly for the renter to handle. This will often result in an attempt to renegotiate the rent. A triple net lease on a commercial property can significantly increase the renter’s operating expenses.

Every situation is unique and the type of lease that will work best for a tenant will depend on many factors.

Should You Invest in a House at an Auction?

Should You Invest in a House at an Auction?

Buying a house is always a challenge. There are plenty of hurdles to get over before taking possession. There are often realtors to consult, and commissions to pay. There are inspections that have to be completed. It can all be rather daunting.

Of course, there are ways to circumvent some of those steps. One option can be purchasing a home at auction. When investing in a house at auction, it’s a whole different ballgame. Sometimes, people can’t tour the interior of the home before buying. Nor is there an inspection. It can be a risk.

Additionally, potential buyers also aren’t usually making bids against other would-be householders. Instead, they’re competing with investors. Auctioned properties are popular with real estate investors seeking rentals or lots to develop more thoroughly.

Auctions are also attractive to prospective buyers because of the possibilities. Everyone in real estate has heard a story of someone scoring a diamond in the rough at an auction. Many people walk into an auction hoping for such a circumstance. However, it’s less likely to happen than most people would like to admit.

Competition for homes at auction can be fierce. Seasoned investors know exactly what they’re looking for. They also know the ins and outs of the real estate industry. It can be hard to go up against them in an auction. They may not be interested in homes themselves, but rather, the land they sit on. Anyone looking to score a habitable home at an auction should be cautious.

Homes going to auction generally have big problems. They’re generally up for sale because the prior owners fell behind in their mortgage or property tax payments. What’s more, the housing crisis of 2008 made the general public more aware of property auctions than ever before. So many people are heading down this route that buying at auction may not even lead to the steep discount it once did. This is particularly true for foreclosures in good condition.

Finally, it can be hard to even find properties for auction. Attractive pre-foreclosures sometimes don’t even make it to the auction date, if the owner finds a fix. Online property auctions are becoming more popular. Real estate agents can earn commission on these sales, unlike the traditional live auctions that take place in courtrooms.

Affordable Housing and Real Estate Investment

Affordable Housing and Real Estate Investment

Recently, the problem of housing has come to dominate the conversation in many countries around the world. The UK, with its tradition of council housing, has faced shocks to its system. Housing is more and more out of the reach of many working people there. The US is facing a housing crisis, too. Migration of millennials to cities has created increased demand for housing there. This has driven rents up and out of the reach of working-class people. It almost seems that no matter where you are, rents are soaring up and reasonably priced homes are far and few between.

A companion problem is that working-class wages have stagnated since the Great Recession. Working-class people often lack cars and can’t find a workable way to make a move to the suburbs. All of this has created a seemingly intractable housing crisis in cities like New York, San Francisco and Los Angeles. All of this has been immensely frustrating, both for the people who live in these cities and for politicians. However, there’s also a great opportunity in this crisis, if only people will take the time to think it through.

Currently, four out of ten low income people are either homeless or spending over 50% of their income on rent, which is unsustainable in the long-term. The US is short by at least several million low income housing units. This is a tremendous opportunity for investors, if they are able to play it right. Social housing in the United States often gets a bad name. However, there are real advantages to landlords when it comes to dealing with social housing programs.

For example, section 8 arrives on time every month. Renting to lower income tenants can mean missed, partial or late payments. Dealing with government agencies means much more reliable cash flow, even if there can be a lag initially. Social impact investment firms have also made affordable housing one of their pet causes. Groups like Turner Impact Capital and Building Opportunity have made it a point to focus on affordable housing. This investment takes many forms, from crowdsourcing online to REITs.

Avalon Communities, a company known for providing corporate apartments, has also shifted their focus to renovating older buildings for more middle-income and lower-income clientele. As these big investments by big players demonstrate, there’s a very healthy future in providing low income housing.

Is Real Estate Crowdfunding a Good Investment?

Is Real Estate Crowdfunding a Good Investment?

Real estate crowdfunding is gaining momentum as an opportunity for investors to get in on the ground floor of real estate investing. While other types of real estate investing require industry-specific knowledge or a hands-on approach, crowdfunding offers a less complex method for getting involved. While it does allow investors to get into real estate investing without getting their hands dirty, is it really as worthwhile as it seems?
The Attraction for Investors
There are numerous real estate crowdfunding sites online right now and each one seems to have no trouble attracting new and seasoned investors. This is partly because of the 2012 JOBS Act, which broadened the methods for raising capital and allows companies to openly advertise investment opportunities. As more companies take advantage of these new rules, investors are expected to see a broader range of choices. Real estate crowdfunding companies may start to specialize in certain types of properties, which will allow investors to diversify their portfolios and maintain better control over their investments.
What Does it Cost?
As with any form of investing, there are fees associated with real estate crowdfunding, although the fees tend to be lower with companies that require higher opening balances. For example, CrowdStreet requires you to invest at least $10,000 over a 36-month period, but doesn’t apply a fee. At the other end of the spectrum, Fundrise lets you get started for just $500, but they do apply a 1% fee. Roboadvisors offers one of the lowest ranges of fees, coming in at 0.25% to 0.60%.
What’s the Bottom Line?
If you’re the patient type, you can do well with real estate crowdfunding. You will have to be comfortable with having your investment capital tied up for a period of one to five years, but, at the moment, the average real estate crowdfunding project does do well. How well? You can expect an annual return of 14.6% on closed transactions. An added benefit of real estate crowdfunding is that it offers new investors an easy way to get started, while also offering investors plenty of opportunities to diversify their investments. Real estate crowdfunding is still relatively new, which may explain why it offers the potential for such high returns. As it becomes more widely known, financial forecasters expect those returns to level out and fall in line with the returns we see in other forms of real estate investing.
Pros & Cons of Investing in Industrial Real Estate

Pros & Cons of Investing in Industrial Real Estate

Investing in real estate is nothing new. People have built fortunes on renting out properties to others. Traditionally, people consider properties like townhomes and apartments when it comes to investing. However, the industrial sector is one niche that can provide many benefits for the average investor.

The Pros

Industrial real estate means dealing with businesses instead of regular people. This translates to longer leases because businesses aren’t likely to change out their location too often. It’s not a surprise for industrial real estate investors to rent out to the same business for decades at a time. It’s much easier to only have to handle getting in one client every ten years than having to worry about a new tenant every year.

Industrial buildings are plain. This allows for any business to really come in and set up their processes and equipment with freedom. This is very much in contrast to a rental home where the main sections of the home, such as the kitchen and the bathroom, are already pre-built and can’t be changed. Businesses tend to pick their locations based on the square footage the property can offer them over traditional factors, like the set up of the building.

The Cons

With every good wealth-building strategy, there are always cons to the pros. When it comes to investing in industrial real estate, there are definitely some cons that everyone should know about before jumping on board. With industrial buildings, we’re talking larger real estate. Larger real estate translates to higher costs to purchase facilities. It’s also important to note that there are less industrial buildings for sale than traditional homes. So it’s going to require some extensive searching in a market or opt to expand out into other market areas to find the right properties.

When renting out an industrial building, it’s likely that the lease will only be renting out to one business at a time. This can have the pitfall of all or nothing income. If the tenant doesn’t pay their rent, then the property owner will be left footing the mortgage bill out of pocket. This can be a drawback for those who would rather have a property rented to multiple tenants.

Investing in industrial real estate is nothing new. People have been doing it for many years. However, investing in the industrial sector comes along with many pros and cons that any investor should be aware of before jumping in headfirst.