R.O.I. Is THE Most Important Thing When Buying Rental Real Estate

What is the most
important thing to look at when you’re investing
in rental real estate? That’s today’s video. Let’s dive in. Hey there. I’m Clayton Morris. I’m the founder
of Morris Invest. I’m a longtime real
estate investor. And today I want to talk
about the number one thing, the thing, to
look for when you’re buying rental real estate. And that thing–
drum roll, please– is return on investment,
also known as ROI. To me, nothing else is
as important as return on investment. I talk to investors
all of the time who own the property they lived
in and then they moved away. And they kept it and
they’re renting it out. And first thing I ask
them is, what is your ROI? And they say, I don’t know. If you don’t know, chances are
it’s either negative or very, very low. For me, I don’t buy
a property unless I can get between 10% and 12%
net return on investment. That means gross is going
to be over 20% usually. That is a very important number. So return on
investment simply means the cash I’m putting
into the property, how much cash am I getting
back from that investment? How much cash flow am
I getting every month? Is that covering what
I’m paying either on a mortgage, monthly loan,
or do I own it free and clear? But what is that
return on investment? Now, I have a very
simple calculator. I’m giving it away for free. It’s below this video. It’s a free ROI calculator. You can download it and use it
to figure out rental properties that, even if you’re
buying them through us at Morris Invest or any
rental property you buy, want to make sure that the
ROI is incredibly high. So return on investment
is the number one thing, because all of the
other factors flow into ROI, right? Vacancy rate, which is
incredibly important. But vacancy rate is
built in to ROI, right? Crime, and so
therefore vacancies, and employment, and if I
can’t rent the property. And is it sitting vacant,
because there’s so much crime and there’s no jobs and
all of those other factors go into ROI. Do you see? It’s like an umbrella. It catches everything. So if I’m not getting the proper
cash flow on the property, then that means my ROI is low. And therefore, I’m not going
to want to buy that property. Let me give you a simple
way to figure out ROI. Here’s the formula. It’s a very quick and dirty
formula for you to dive into when you’re evaluating
a rental property. And of course, if you’re looking
at commercial properties, there’s other big indicators
and there are other things you want to look at. But just for the
sake of this video, I want to explain
ROI on simple terms. You take the monthly rent, OK? $700 a month, multiply
that times 12. 12 months, right? And then we’re going to
take out– I personally– I know I go crazy. I’m really conservative
with my numbers. But I want to take
40% out of my formula. So 700 times 12
gives me a number, multiply that times 0.6. That is going to
take out 40%, OK? That is a number. Now, I’m going to
divide that now by the all in cost of the
house that I just bought. So a $40,000 house, which
is typically what the houses that I do. And there you go. Right there is my ROI
number right there. That’s a phenomenal return
on investment, right? So if that number shakes
in different ways– let’s say the rent is lower and
the cost of buying the house is higher, your ROI
is going to go down. There are a number of
other indicators, right? Maybe expenses are higher. Maybe your taxes are higher. All of those things are
built into my formula. Very important to look at
ROI when you’re considering a purchase property. To me, almost
nothing else matters. I don’t care about four
walls, the walls, with a roof. Four walls and a roof,
that’s a house, right? The main thing I care about
is return on investment. Do not fall in love
with real estate. Fall in love with
ROI and you’ll be a successful rental investor. I’m Clayton Morris. Please subscribe to
the channel here. We have tons of great resources
and tons of great play lists to help you figure out your
journey in rental real estate investing. And as always, you can leave
comments below this video, any questions you have. I always jump in and
engage with our audience. And please, share this
with someone you know is interested in
rental real estate. Please, we’ll see you
back here once again. We always do videos
multiple times a week. And I’m excited to share
these with you every week. Have a great one everyone. Bye bye.

44 thoughts on “R.O.I. Is THE Most Important Thing When Buying Rental Real Estate

  • So does that mean at $700.00 the rental would have to cost around $50,000 so your ROI would be about 10% 10.08 or so.

  • Excellent video, thanks Morris.
    and .. playing with the formula…we may use the 72 value:

    Minimal Rent Required for 10% ROI = Purchase price of the House/72

  • Do you look at the net rent vs current property value ratio too? I see a lot of CITES property value go up very fast but the rent is not synchronized much. For that, do you think it is building bubbles?

  • But what if you're only putting 20 percent down payment? Your ROI would be much higher, no? Because then for instance for a $40k house, you invest only $8000, and say you get 600 monthly rent. ROI would be about 54%?

  • Great video. I really liked your rule of thumb advice on having at least 10% net ROI for the properties. I am wondering does the same goes for California market as well. As you know a typical 1-2 BR property in the California coastal cities sell for upwards of 500-600K and usually rent for about 2.5-3 K, which is about 4% net ROI. IMO, most people buy these properties anticipating the 3-4% annual appreciation of property value to get them to 10% ROI range eventually. Should I stay of this market altogether and look into other states or areas?

  • Hey Morris love the videos. Awesome information. I have a question about the ROI. Do you take the mortgage out when you account for 10% return or is it included with it?

  • im sure you have gone over this a few times but i can't find it. how do you figure out the ROI if you don't have anything into the home? example if i buy a home under value and rehab it and then refinance it and i end up having little to no money of my own in it. how then do you calculate roi? the home would have a payment and maybe some of my own personal money into it
    buy a home for 50,000 put 30,000 into it home appraises for 100,000 i do a HELOC and get 75,000 back i would only have 5,000 into it of my own money. Heloc at 4.75% thats $3562 a year in interest and 5000 of my own money the home should bring 800 a month and it will have all new major systems in the home
    thanks jon !!!

  • I like this and use it to calculate what my rent should be for an apartment. Calculating rent can be done by reversing the formula. Then I look at the number and see if it works for the place and is it comparable to the area.

  • Hi Morris i just saw few of your videos. You definitely give great suggestions end it's easy to see how much you are passionate about it. Unfortunately is not possible to apply them here where i live. In Australia in fact there are no property at allfor 40 or 50 k.

  • I have a question and its been on my mind for a while now, im 21 and buying into my first property now im looking into a $60,000 home it has 4 rooms 1.5 baths now should i buy my first single family home as a rental property or should i live in it for a year as a home then rent it?

  • ROI…I haven't seen a YouTube on reducing property taxes by filing a complaint against the valuation. Every county's auditor has a Board of Revisions. I do it on every purchase and it has saved me a lot of money… The county has the property valued at $80k and I purchase it for $40k . They want a form and settlement statement and WaLa my ROI instantly increases.

  • Clayton, can I use this formula from the current principal bal on my mortgage? Even tho it's not from the original purchase price(bc it's been paid down).

  • There is no calculator. For a house of 100k buying using credit with a downpayment of 50k. How dow you calculate the ROI?

  • Clayton, I've emailed you and tried reaching out.

    I'd like to send you my free book and tell me what you think.

    I feel there's no way to contact you. Reach out!

  • Does the same formula applies to a property that is mortgaged with a 40% downpayment and the 60% being mortgaged. Or just use the 40% as the basis for the property price since the balance will be paid by the tenants.

  • Is Buying cash on cash the only way to get 10% to 12 % net Having a mortgage on the prooerty lowers roi to 10% gross and 6% net . It wouldnt be worth it right ?

  • Just made a spread sheet to track this. I'm now monitoring the ROI based off the total cost of the property and the total original investment.
    if your just going off of what you put down the ROI is crazy HIGH!! thanks for the info will be binge watching your channel. this info is too good!!

  • Define House All In. Does that include holding costs, closing costs, repairs, etc? I need to know what you add to get your house all in number.

  • Hi Clayton, Long time viewer here. Thanks for all your hard work making these videos! What are your thoughts on Rochester, NY properties and do you think your ROI formula should work on most properties there? I'm a little nervous that the cost of maintenance may be higher than usual since most homes there are very old. However, the market is very affordable to enter, the rent price to home price ratio seems high and it's reasonably close to where I live (Boston), which would be ideal for my first property.

  • How can I calculate the ROI on a house I currently own? I charge $1700 for rent. We paid $155k (plus $10k upgrades) 3 years ago. It’s now worth $225k. Thank you for the video!

  • If you were to purchase a house with a credit card how would you calculate a monthly credit card payment

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