When Will I See ROI on My Rental Property?

Generally, your San Diego rental property begins making money for you as soon as you buy it. However, we know that it is not always easy to see your return on investment (ROI) right away. This can be frustrating for real estate investors. 

How soon can you feel like you’re making money when you rent out a property?

The answer may not be exactly what property owners want to hear, and that is: it depends. 

The point at which you actually begin to see ROI on your investment depends on a number of factors, such as whether there’s an outstanding mortgage or if you needed to do extensive renovations to the property.

There’s no single ROI formula that will tell you when your property starts making money for you. But, if you consider the following factors, you may see how buying and holding real estate allows you to gradually build wealth. You may not get rich quick when investing in San Diego real estate, but you will make money over the long term. 

Here’s how you can determine your ROI. 

How is Return on Investment Calculated?

Your return on investment, or ROI, can best be described as the profit you earn annually as a percentage of the total amount of cash you invested into the property. 

This is why there are differing timelines for investors. If you bought a single-family rental home in cash, your ROI will likely be much lower than if you financed the property. Your mortgage or loan leverages what you earn because you have not invested too much cash into the property at the point of purchase. 

Currently, the real estate market has some of the highest prices we have seen. So, it will likely take you longer to see a return. This is based on current purchase price and what investors will have to spend to acquire a home in San Diego. If you bought a property at a lower price point, during a less competitive market, you’d see a larger return faster. 

In San Diego’s rental market, you will likely see a positive return after you’ve rented the property out for a few years, as long as you keep the home occupied with good tenants and you can reliably raise your ROI a little each year. 

Methods of Measuring Returns on San Diego Investment Homes

There are different benchmarks that investors use to measure their own ROI. Most experts like to use the cash on cash return model to establish whether they’re earning any money on their investment property. 

The formula isn’t complicated. 

Your cash on cash return is the annual net operating income less loan payments from operations divided by the total cash invested in the property. 

The cash on cash return formula looks like this:

Annual NOI - Debt / Total Invested Cash = Cash on Cash Return

Remember, your return will grow over time. If you can see a return from 2 to 6 percent in the first year, you’ve made a good investment. As you hold your investment property, you likely will be able to lower expenses and make some cosmetic improvements and minor upgrades to increase rental value. That’s when you’ll really see an impressive return. 

Capital Appreciation and Increasing Value