Before you make any investment, you must calculate the ROI. Investing in a rental home is no different, but it can be tricky to calculate the property’s ROI with so many factors determining the final figure.
You should always be careful with your money when making any investment and use the best tools available.
It’s good to know what resources you’ll have available for your marketing needs and all the rest. To make things easier for you, it’s best to use a comprehensive cash flow calculator. The calculator, also referred to as a cash on cash return calculator, is designed to help investors better understand the ROI of a prospective short-term rental investment.
Often, as an investor, you will only be given the gross annual income and a list of the utility costs. Investors are then left vulnerable to the occupancy rate and other potential expenses.
The world is rapidly changing, and so are the costs involved in running a rental property. A cash flow calculator can help you to review all the costs involved and give you a much clearer picture of your short-term rental returns to make the best investment possible.
You’ll need a Cash on Cash Return Calculator
A cash on cash return calculator, or CoC, is a more complex and necessary calculation for an investor using finance (mortgage/loan) to pay for the rental property.
Put simply, the CoC is the ratio of the property’s annual NOI and the total amount of cash invested in the rental property. The formula is as follows for CoC:
CoC = (Annual Cash Flow/Total Cash Invested) × 100%
For example, let’s say you bought a $100,000 rental property, and you put down a 10% deposit and took a mortgage. Your costs will be $10,000 for the deposit, $1,500 for closing costs, and $8,000 for remodelling/fixing up.
The total cash you invested is $19,500 ($10,000 + $1,500 + $8,000).
Don’t forget, when using finance, you will have to pay interest each month, so that needs to be included in your calculation. Let’s say that interest is $600, and your tenant pays $1000 every month.
That means you will have an operating cash flow of $400 per month. After 12 months, your annual return will be $4,800.
How to find an investment property in your area
Finding the “right” investment property is half of the struggle when building a property portfolio. To make things easier, here are five simple tips you can follow to help you find an investment property in your area.
Where to look
Discovering the best place to buy a property in your area doesn’t have to be complicated. First, as a general rule of thumb, check which areas have one or more of the following:
If you’re specifically looking for short term rental for tourists, find an area with one or more of the following:
- Central location near the tourist hotspots.
- Public transport nearby.
- Local bars, restaurants, shopping malls, nightlife, theatres, festivals, etc.
- Proximity to the beach, mountains, lakes, national parks, etc.
To find the best areas, you have to think like your prospective tenants. If they were to rent your home, what would they need to enjoy their stay as much as possible?
Doing this will ensure that your rental home’s demand will stay consistent throughout the year or high seasons. Do some thorough research by asking people around the area or even current landlords. The more information, the better.
Use an Online Database
Online databases like Realtor.com, Trulia, Zillow, and Craigslist can help you to find what properties are available in your area quickly. They often give you a lot of information to look at to aid your decision.
Each website comes with several search filters that can help you find prospective investment opportunities quickly.
Alternatively, you can hire the expertise of a specialist short term rental agent like Avery Carl of The Short Term Shop.
Avery has optimized her site to be easily accessible and by using her team, you can get access to exclusive properties in the some of the most sought after and popular tourist areas in the country, including:
- Smoky Mountains
- Florida – Destin, 30A, & Panama City Beach
- Alabama – Gulf Shores & Orange Beach
Each area is consistently listed as some of the USA’s best places for short-term rentals by Rented.com.
Networking is a great way to get ahead of the game. Using your network of tenants, realtors, fellow investors, contractors, and accountants, you can get news about hot properties quicker.
If you’re looking for a short term rental property in your area, speak to any one or all of these people to see if they know of any opportunities. You may get a preference for a first viewing, allowing you to get ahead of the competition and make an excellent investment.
Taking Advantage of Foreclosures
Someone losing their home because they cannot make the mortgage payments is never good news. But, it does present an opportunity for investors. Once a bank repossesses the property, they will then want to sell it.
Foreclosures are often some of the best property investment opportunities out there with some great deals to be had. Speak with your local estate agent or your property manager to help you get news of foreclosures coming onto the market. Some techniques for real estate agents can work for you too!
Short term vs. long term
Both short term and long term rental property investments can be lucrative for an investor. Deciding on which is best is determined by the area you’re buying and the property’s purpose.
A short-term rental will typically include a fully furnished house, apartment, or condo in an area with large numbers of tourists. Airbnb properties are the best example of short term rentals being extremely rewarding if done correctly.
For example, let’s say you buy a short term rental property by a popular beach on the South East coast. Millions of tourists will flock to your area to enjoy the sun with their families all year round.
If your property is in a good location, is nicely furnished, and you’re a good host, you may find yourself fully booked months in advance.
You can also make a lot of extra money during the holiday seasons and increase your rates. However, your success with AirBNB is very much dependent on the maintenance of the property, your attitude towards tenants, having strong communication skills, and your willingness to be helpful.
Running an Airbnb can be hard work but very rewarding.
Long-term rentals are usually reserved for families, students, and expats. They’re an attractive option as you will receive guaranteed income over a long period, typically 12 months or more.
There is generally less risk with long-term rentals and they give you, the investor, more stability, and security. Still, tenants can be unpredictable at times, so you must put in place a proper vetting system to make sure you get the type of tenants you want.
Maintaining a healthy and happy relationship with your tenants is integral to the success of your investment. Irresponsible tenants can damage your property, make your life difficult, and reduce the amount of joy you derive from owning a rental property.
If you don’t wish to manage your tenants, hiring a property manager can help significantly. They will incur their own costs, but you will save a lot of time and stress. It’s important to weigh this up when renting your property out.
How to get started investing in rental properties
If you’re intrigued by short term rental opportunities, it’s simple to get started. Here are some tips:
Get the money first
Don’t dive straight into an investment. Instead, save the money you want to put down or the full amount for the property. Don’t give up your day job just yet, or you may end up in a vulnerable financial position.
Start your investment portfolio strong with all the money you need in the bank.
Focus on positive cash flow properties
Using the information above and a cash flow calculator, you can find the best cash flow positive properties to start your property portfolio. Do your due diligence and be thorough in your research of every property before taking the plunge.
Don’t be afraid to speak to other investors, estate agents, and property managers for advice. Every little helps!
Avoid Bad Neighborhoods
Sure, there are great investment opportunities to be had in rundown neighborhoods. The investment might appear to be a steal on paper and the cash on cash return calculator.
But, there are factors beyond the numbers that will affect your investment. If it’s a high vacancy area, you may not get the tenants or the income you hoped for.
Instead, focus on developed areas with good schools, transportation, and essential amenities. If you’re buying short-term rental properties, keep an eye on areas with large and consistent annual tourist numbers with amenities like the beach, national parks, good nightlife, and activities.