What is Return on Rent and Why Should You Care?
Return on Rent (ROR) is a metric that helps landlords and investors understand the profitability of their rental properties by comparing rental income to operational and mortgage costs.
A high ROR means your property is generating a substantial profit margin and making your investment worthwhile. Conversely, a low ROR might suggest that you need to reevaluate your costs, rental prices, or even reconsider your investment strategy altogether.
How to Calculate Return on Rent
Here is the formula:
[\text{ROR} = \frac{\text{MR} - \text{OC} - \text{MC}}{\text{OC} + \text{MC}} \times 100]
Where:
- Monthly Rent (MR) is the income you collect each month for renting out the property.
- Monthly Operational Costs (OC) include expenses like utilities, property management fees, and maintenance.
- Monthly Mortgage Cost (MC) is your monthly mortgage payment.
Calculation Example
Imagine you own a rental property with the following numbers:
- Monthly Rent: $2,500
- Monthly Operational Costs: $600
- Monthly Mortgage Cost: $1,100
Plug into the formula:
[\text{ROR} = \frac{2{,}500 - 600 - 1{,}100}{600 + 1{,}100} \times 100]
[\text{ROR} = \frac{800}{1{,}700} \times 100 = 47.06]
Your Return on Rent is 47.06%. For every dollar you are spending on operational and mortgage costs, you are getting almost 47 cents back as profit.