Investing in Rental Properties the Importance of Roi

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Calculating ROI: A look back at Beach Front Apartments

Here’s how we initially assessed Beach Front Units with more realistic expense estimates for a 45-unit site in Seal Beach:

• Purchase Price: $12 million
• Average Monthly Rent: $2,200 per unit (well below the Seal Beach market average of $2,600)
• Monthly Rental Income: $99,000 (due to low rents and high vacancy)
• Running Expenses: $62,000/month, covering site taxes, upkeep, plan, utilities, and site care.
• Site Taxes: 1.1% of purchase price (~$11,000/month or $132,000/year)
• Plan: $3,000/month
• Upkeep &. Repairs: $15,000/month
• Utilities: $5,000/month
• Site Care: 5.5% of revenue ($5,445/month)
• Vacancy Rate: 12% (5-6 units steadily vacant)
• Loan Terms: $9 million financed at 4.5% interest over 30 years

These numbers helped us begin calculating ROI for this asset site by first finding the Net Running Income (NOI) and then the Cash-on-Cash Return.

Step 1: Calculate Net Operating Income (NOI)

Net Running Income (NOI) is a key metric in checking rental site assets. It measures net income before financing costs:

NOI = (Monthly Rental Income × 12) - (Annual Running Expenses)

For Beach Front Units, we calculated:

NOI = ($99,000 × 12) - ($62,000 × 12) = $1,188,000 - $744,000 = $444,000/year

The site’s NOI of $444,000/year was well below its upside due to below-market rents and high vacancy rates. These numbers provided a clear picture of the upgrades that could be made to increase net income.

Step 2: Calculate Cash-on-Cash Return

Next, we calculated the Cash-on-Cash Return, which shows the speed of the owner’s cash asset:

Cash-on-Cash Return = (Annual Cash Flow / Cash Invested) × 100

With $3 million in equity (the difference between the purchase price and the loan), the cash-on-cash return was:

Cash-on-Cash Return = ($444,000 / $3,000,000) × 100 = 14.8%

While 14.8% isn’t bad, it showed there was room for big upgrade through smart care and value-add efforts.

Cap Rate at Purchase vs. After Value-Add Work

One of the key metrics in real estate asset is the cap rate (capitalization rate), which shows the return on asset based on the site’s NOI and its purchase price. Here's how we calculated the cap rate for Beach Front Units:

Cap Rate at Purchase

At the time of purchase, with an NOI of $444,000 and a purchase price of $12 million, the cap rate was:

Cap Rate = ($444,000 / $12,000,000) × 100 = 3.7%

This 3.7% cap rate is typical of sites in desirable coastal markets like Seal Beach, where cap rates are often lower due to the premium on site.

Cap Rate After Value-Add Work

After using value-add plans. Such as raising rents, reducing vacancy rates, and cutting running expenses. Let's recalculate the cap rate based on an improved NOI.

Here are the new figures after the upgrades:

• New Monthly Rental Income: $117,000 (with market rents of $2,600 per unit)
• New Running Expenses: $60,000/month (due to cost gains in upkeep and utilities)
• New NOI: ($117,000 × 12) - ($60,000 × 12) = $1,404,000 - $720,000 = $684,000/year

With an NOI of $684,000 after the upgrades, the new cap rate was:

Cap Rate = ($684,000 / $12,000,000) × 100 = 5.7%

This increase from 3.7% to 5.7% demonstrated a big upgrade in the site’s net income. This makes it a far more attractive asset in the market.

Improving the ROI: Coastline Equity’s Strategy for Beach Front Apartments

Using these calculations, Coastline Equity used a plan to improve the ROI for this rental site:

1. Address High Vacancy Rates: We improved the leasing step and used targeted marketing plans to reduce the vacancy rate from 12% to just 3%. Filling those extra units increased the monthly rental income.
2. Raise Rents to Market Value: The site’s average rent was $2,200 per unit, well below the market rate for Seal Beach, which averaged $2,600. After updating some units and common areas, we gradually increased rents, raising total monthly income to $117,000.
3. Cut Running Costs: By leveraging our network of trusted vendors and renegotiating service contracts, we reduced running expenses from $62,000 to $60,000 per month.

Recalculating ROI: A New Financial Outlook

After making these upgrades, we recalculated the real estate ROI using our asset calculator:

• New Monthly Rental Income: $117,000
• New Running Expenses: $60,000
• New NOI: ($117,000 × 12) - ($60,000 × 12) = $1,404,000 - $720,000 = $684,000/year

This increase in Net Running Income (NOI) boosted the site’s overall net income. Let’s also revisit the Cash-on-Cash Return calculation:

Cash-on-Cash Return = ($684,000 / $3,000,000) × 100 = 22.8%

With these changes, the owner saw a 22.8% return on their cash asset. An impressive upgrade driven by better care and smart adjustments.

What’s a Good ROI for Real Estate Investors?

One of the most common questions from new investors is: “What is a good ROI in real estate?” While the answer varies depending on market states, a Cash-on-Cash Return of 8-12% is often considered good. In this case, after using our plans, Beach Front Units reached a 22.8% Cash-on-Cash Return, showing how early care can transform a site’s results.

Key Takeaways for Calculating ROI on Rental Properties

1. Know Your Vacancy Rates: High vacancies can devastate your cash flows. By reducing vacancies and keeping use high, you can grow your rental income.
2. Monitor Your Running Expenses: Keep a close eye on running costs. This includes site tax, plan. Upkeep, as they can greatly impact your Net Running Income (NOI).
3. Often Review Your Rents: If your rents are below market, you’re leaving money on the table. By updating units and keeping up with the market, you can justify rent increases, which improve your cap rate and overall ROI.
4. Use the ROI Calculator: Running your numbers often through a rental site calculator allows you to keep track of how changes in closing costs, loan terms. Rents affect your returns.