We work with investors who are at various stages of their real estate careers. Some of them have recently invested for the first time and others are steadily growing a profitable portfolio of rental homes.
One of the questions we get asked most frequently is: when will I start making money?
The truth is, you start making money as soon as you acquire your property.
That doesn’t always show up as cash, however.
You’ve likely decided to invest because you want to make money. There’s a lot of talk about how owning real estate can help you establish wealth and build a pretty solid financial footing. But, it can be unnerving when you spend a large amount of money on a property that doesn’t seem to be earning you much money in the first year or two.
The speed with which you see a return on your investment will depend on several specific factors. You’ll have to consider:
- How the property was financed
- What you’re earning in rent
- What you’re spending on maintenance, vacancy, and other expenses.
Profit will be driven by the type of property you earn. Single-family homes will earn ROI at a different pace than multi-family units or apartment buildings.
Earning real money requires a buy and hold strategy, especially in the current red-hot market. You’ll need to map out a long-term strategy if you want to see the best possible returns.
For a while, buying a home and then flipping it was a popular way to immediately earn some serious ROI on your property. That’s not so true anymore. People are choosing to buy and hold their real estate investments, and if that’s your strategy, you’ll have to be prepared for the long haul.
Here’s the good news. Your real estate investment is going to make you money, especially when you have a reliable tenant in place who is paying rent and taking care of the home.
Here’s the less good news. Depending on the investment you’ve made, you might not see a profit right now or in the next year or even in the next handful of years.
That’s okay, because ROI isn’t something that can be measured at the beginning of your investment cycle. You’ve made an investment that a tenant is helping to pay for. The longer you’re willing to hold onto that investment, the higher your returns and earnings will be.
Let’s take a look at why this matters and what it really means.
Why Are You Investing in Dayton Real Estate?
To put into perspective the length of time it may take to really see a return on your real estate investment, you have to remember why you invested in the first place.
- You’re investing to gain leverage, which you can’t get from the stock market. Only in real estate do you have the potential to increase what you earn with money that isn’t your own.
- Diversification. There are so many options with real estate investments. You can own single-family homes, multifamily properties, or a mix. You can rent out commercial space or focus on short term vacation properties.
- Long term ROI. Real estate is the best investment for future earnings. You’re earning from compounded returns and investment growth. Your property values are going up and the amount of money you owe on those properties is going down.
When your rental property isn’t delivering thousands of dollars in cash the first year, don’t get discouraged. You’re earning money.
Factors that Influence Timing on Returns for Dayton Investment Properties
Generally, you’ll see faster returns on smaller apartment buildings and multi-family units, but that’s a rule that has exceptions. Location will impact your ROI and the market itself will determine how quickly you’re able to increase rents and make more money.
Here are some of the other things you’ll need to consider.
- Your down payment. The amount of money you’ve spent out of pocket will determine how quickly you see a return on your investment. Generally, putting down less cash will lead to a larger loan balance. But, you may find yourself making more money faster. Leveraging the purchase with someone else’s money typically works out better for investors.
- Location. Rental values are largely driven by where the property is located. You’ll earn higher returns faster when you’re in a desirable neighborhood where tenants are eager to live. They’ll be willing to pay more.
- Property condition. You can’t control the market and once you own a property, there’s not much you can do about its location. You can determine the condition of your property, though. Avoiding deferred maintenance and improving your rental home will lead to better returns that show up pretty quickly.
When do you know you’re making money?
A lot of experts will encourage you to aim for 10 percent ROI. In their first year or two, however, five or six percent will look pretty good to most investors. Smaller returns are pretty common in the first few years.
Don’t be overconfident about what you should be earning. It’s simply not easy to achieve high returns in the current market, and if someone is telling you there’s no doubt you’ll earn 10 or 12 percent right away on your investment, you should be cautious in taking that advice.
Every Dayton Real Estate Investment is Different
Decide on the metrics you’ll use to measure your own success and your own returns. But don’t fall into the trap of comparing yourself to other investors. Remember that every property is different. Every investor is different. The money that someone else is making has nothing to do with your own earnings.
There’s no threshold you have to reach and no deadline to reach. Maybe your cash-on-cash ROI after you make your mortgage payment is only two percent in your first year. The next year it might be three percent and then maybe it jumps to five percent the year after that.
Once your rents go up and your property value does as well, you’re going to be able to double the cash you’ve invested. That’s when you start to make some real money. And you don’t do it by rushing. You do it by buying the right property, holding that property, and making smart decisions about how to rent it out, manage it, and maintain it.
You may not make a lot of money from rent collections and other operations. But, in a seller’s market like the one we have now, there’s going to be a lot of equity quickly earned. The appreciation that you’re earning counts.
Measuring Returns on your Dayton Investment
How can you measure your returns now and in the future? It’s simply shown as the profit you make annually as a percentage of the total cash you put into the property.
The investments you acquire now are at higher prices than they’ve been over the last few years. Median home values are rising and the inventory of available homes is low, making those on the market all the more valuable.
You want to buy below market value whenever you can, but that’s not going to be remotely easy to do in the current market. That doesn’t mean you won’t be able to make money on your investment or see some impressive returns in a reasonable amount of time.
The key is to know your metrics and apply them to your investments. Here are some good ones that may help.
- Cash on cash return. You’ll get this number as the annual net operating income less loan payments from rental income divided by the total cash invested in the property. You should get a positive cash on cash return in your first year, and then you’ll find higher returns over time. Those increases will come when you raise rents, lower your expenses, and take care of cost-effective upgrades and improvements at the property.
- Equity multiple. This is the amount by which your cash investment will increase over a specific period of time. Most investors like to double their cash in about five years. If you can do that, you’re working with a profitable investment property.
- Internal rate of return. This metric represents your all-around return. It’s the total amount your cash investment earns from rents plus appreciation when selling the property. This will likely be your highest number.
Rents in Dayton are going up, and that’s going to help you get to a positive return rate faster. But, most Dayton investors won’t start earning money in the first months that they own a rental property. In the early months of ownership, often the amount of rent you collect will not exceed the expenses associated with the rental property. If you are earning positive cash flow right away, you’re off to a terrific start.
Instead, you’ll earn ROI through capital appreciation. You’ll set yourself up for some impressive returns over the next few years. The longer you hold your property, the more money you’ll make.
This can get confusing, and we’re happy to talk through it with you in greater detail. Please contact us at ManCo Property Services.