How to Determine A Good ROI on Rental Property: A Broker’s Guide

You're a broker, and you know the importance of maximizing your client's return on investment (ROI) in order to build trust and grow your business. Whether they're seasoned investors or beginners, knowing how to calculate and increase ROI on rental properties can be a game-changer.

In this blog, we’ll break down everything brokers need to know about how to determine ROI on rental property, including tips for gathering accurate numbers, calculating ROI, and helping your clients make smart, profitable decisions.

Why ROI Matters for Rental Properties

ROI is one of the most important metrics for evaluating the profitability of a rental property. It shows how much money your clients can expect to make on their initial investment, expressed as a percentage. Here’s why ROI matters:

• Profitability: A high ROI means your clients are making more money relative to their investment.
• Risk Management: Calculating ROI helps your clients identify potential money pits before they buy.
• Portfolio Growth: Understanding ROI allows your clients to compare properties and choose the best investments for their portfolios.

By helping your clients calculate and improve ROI, you’re not just guiding them toward better investments—you’re also positioning yourself as a trusted advisor.

How to Calculate ROI for Rental Properties

To calculate ROI on rental properties, there are a couple of important steps. Here's how you can take your clients through the process:

1. Determine Potential Annual Rental Income

The first step is to estimate how much rental income per year the property will produce.

How Brokers Can Help:

• Use your local market expertise to provide accurate rental income estimates.
• Share data on comparable properties in the area.

2. Assess Cash Flow

Cash flow is how much money is left after paying expenses such as mortgage payments, taxes, insurance, and maintenance.

How Brokers Can Help:

• Help clients create a detailed budget that includes all potential expenses.
• Highlight strategies to maximize cash flow, such as reducing expenses or increasing rental income.

3. Calculate Net Income

Net income is the rental income minus all expenses.

How Brokers Can Help:

• Provide templates or tools to help clients calculate net income.
• Educate clients on the importance of including all expenses, even small ones.

4. Find the ROI

The last step is to calculate the net income and divide it by the overall initial investment.

How Brokers Can Help:

• Use the formula: ROI = (Annual Return / Total Investment) x 100.
• Provide examples to help clients understand how the calculation works.

Gathering Accurate Numbers for ROI Calculations

You need to have the right figures when calculating ROI. This is what your clients need to bear in mind:

Upfront Expenses

• Down Payment: The initial cash investment required to purchase the property.
• Closing Costs: Fees associated with the purchase, such as title insurance and attorney fees.
• Repairs/Renovations: Costs to make the property rent-ready.

How Brokers Can Help:

• Connect clients with contractors who can provide accurate repair estimates.
• Help clients negotiate closing costs with sellers.

Ongoing Expenses

• Property Taxes: Annual taxes based on the property’s assessed value.
• Insurance: Coverage for the property and liability.
• Maintenance: Regular upkeep to keep the property in good condition.
• Vacancy Costs: Setting aside 10% of monthly rental income for vacancies.
• Repair Costs: Setting aside 5% of monthly rental income for repairs.

How Brokers Can Help:

• Provide tips for minimizing ongoing expenses.
• Recommend property management companies to handle maintenance and repairs.

What Is a Good ROI for Rental Properties?

There's no single answer, but most property investors target an ROI of 5% to 10%. Here's why:

• Competitive Returns: An ROI of 5% to 10% is generally higher than other forms of investment, like stocks or bonds.
• Risk Management: A higher ROI helps offset potential risks, such as vacancies or unexpected repairs.

How Brokers Can Help:

• Educate clients on what constitutes a good ROI in their local market.
• Highlight properties with strong ROI potential.

Other Considerations for Maximizing ROI

Here are a few additional tips to help your clients maximize their ROI:

1. Leverage Financing

Using financing can boost ROI by reducing the upfront investment.

How Brokers Can Help:

• Partner with lenders like RCN Capital to offer flexible financing options.
• Explain how leveraging financing can improve ROI in the short term.

2. Consistent Approach

When comparing a number of different properties, it's worth using the same methodology for calculating ROI.

How Brokers Can Help:

• Provide templates or tools to ensure consistency.
• Help clients compare properties based on ROI and other key metrics.

3. Market Research

Each real estate market is unique, so the research needs to be comprehensive. 

How Brokers Can Help:

• Share data on local market trends and rental demand.
• Highlight neighborhoods with strong growth potential.

Determining and improving ROI for rental real estate is a skill that investors must master in order to survive in the field of real estate. By aiding your clients to come up with the right numbers, calculate ROI, and make correct investment choices, you can make yourself a well-reputed expert and expand your business simultaneously.

Why Brokers Should Partner With RCN Capital

At RCN Capital, we know the special needs of real estate investors—and the brokers that serve them. Here's why brokers prefer to work with us:

• Flexible Programs: From fix-and-flip financing to long-term rental funding, we provide solutions to suit your client's requirements.
• Fast Closings: We can close loans in as few as 10 business days, helping your clients move quickly on opportunities.
• Broker-Friendly: We value our relationships with brokers and offer competitive commissions, fast approvals, and dedicated support.

By partnering with RCN Capital, you can provide your clients with the financing solutions they need to succeed in the competitive world of real estate investing.

Ready to take your brokerage to the next level? Connect with us today to discuss our real estate financing solutions and how we can help you grow your business.