Like any other investment, you should be most concerned with net return based on initial investments.
Scoring a good deal when you first buy is probably the best optimizer to this equation, but here are some other things to keep in mind.
(Monthly income – monthly expenses) x 12 – yearly expenses -> this is your net rental return per year
Divide that by your initial capital investment and get yearly return in percentage.
Monthly income = rent
Monthly expenses =
* many people forget to factor time spent into expenses (though it may not be tax deductible)
Yearly expenses = property taxes, insurance, refi costs, major repairs, rental licenses, etc
Initial capital = down payment, renovation, etc
Optimizing goes beyond a simple look at reducing expenses and/or increasing rent.
Things to watch out for:
- Make sure to factor in time spent, as mentioned above
- Paying off a portion or all of the principle on the mortgage adds to that initial capital, I’ve seen people miss this and think they’ve greatly increased their return for “free”.
- Taxation. When comparing rental property against other investments, think of net income as dividends or interests earned. These are all taxed at your income tax rate. When you sell the property, the capital gain or loss is taxed at the capital gains rate. Just be sure to make apples to apples comparison when comparing against other types of investments.