December 2023

When you buy a rental property, you do so with one goal in mind: to generate a positive return on investment (ROI).

So, What Is a Good ROI on Rental Property?

A good ROI on rental property typically ranges from 6% to 10%, although this can vary with location, property type, and market conditions. In some areas, ROIs over 12% are possible, while in expensive urban locations, a 4% to 6% ROI may still be favorable.

Now, let’s examine the finer points associated with rental property ROI.

How ROI on Rental Property Is Calculated

ROI on rental property is calculated by dividing annual rental income by the total investment cost, providing a percentage that reflects the property’s profitability. This percentage provides a clear understanding of how profitable your property is (or isn’t).

Here’s an example to illustrate how ROI is calculated for rental property. Suppose you’ve purchased a rental property for a total investment of $200,000, including the purchase price and renovations. In a year, you earn $18,000 in rental income from your property. 

To calculate the ROI, divide the annual rental income ($18,000) by your total investment cost ($200,000). This calculation gives you 0.09, or 9%, which is the ROI. 

Factors Impacting ROI on Rental Property

There’s no shortage of factors impacting ROI in rental property. Here are the most important ones to consider: 

• Location: The geographical area where the property is located greatly impacts its rental demand, property values, and potential rental income.
• Property condition: Well-maintained or newly renovated properties generally yield higher rental incomes and require less maintenance costs, positively affecting ROI.
• Market trends: Real estate market conditions, including housing demand, rent prices, and economic factors, play a role in determining ROI.
• Financing costs: The terms of your mortgage, including interest rates and loan duration, influence your overall investment cost and ROI.
• Operational expenses: Costs such as property management, maintenance, insurance, and taxes directly affect the net income from the property.

Why Is 6% Considered a “Good” ROI on Rental Property?

When it comes to rental property, 6% ROI is commonly regarded as “good” due to several factors and general trends in real estate returns. This benchmark is shaped by these details.

Market comparisons

Historically, the average ROI for real estate investments hovers around the 6% mark. This figure is derived from long-term data, making it a reliable baseline for comparison.

Balancing risk and reward

A 6% ROI strikes a balance between risk and return. Higher ROIs might be attainable, but typically come with increased risk, such as buying in less-stable markets or purchasing properties requiring substantial improvement. Conversely, lower-risk investments often yield returns below 6%.

Comparison with other investments

When compared to other forms of investments like stocks or bonds, a 6% ROI in real estate is competitive, especially when considering the added benefits of property ownership, such as potential appreciation and tax advantages.

Inflation and economic factors

The 6% figure also takes into account broader economic factors like inflation. It represents a return that not only keeps pace with inflation but also offers real growth in investment value.

Local market variances

While 6% is a general benchmark, local market conditions can affect what’s a “good” ROI. 

Quick Tips to Improve ROI on Your Rental Property

Improving the ROI of your rental property involves strategic upgrades and efficient management. Here are some tips you can quickly employ:

• Optimize rental pricing: Regularly assess the local rental market to ensure your rental pricing is competitive, yet maximizes income. Avoid overpricing, which can lead to long-term vacancies.
• Enhance property appeal: Simple aesthetic improvements, like fresh paint or updated landscaping, can increase the property’s attractiveness and justify a higher rent.
• Reduce operating expenses: Audit and minimize ongoing expenses such as utilities, maintenance, and property management fees to increase net income.
• Effective marketing: Utilize various marketing channels, with an emphasis on online platforms, to reach a large audience and subsequently reduce vacancy periods.
• Regular maintenance: Proactively maintaining the property prevents costly repairs in the long run and keeps tenants satisfied, reducing turnover rates.

Final Thoughts

Now that we’ve answered the question “What is a good ROI on rental property,” you have something to strive for. If your return is falling short of the 6% benchmark, implement the guidance and tips outlined here today.

Find financial freedom through rentals

If you’re considering using rental properties to build wealth, this book is a must-read. With nearly 400 pages of in-depth advice for building wealth through rental properties, The Book on Rental Property Investing imparts the practical and exciting strategies that investors use to build cash flow and wealth.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

In March 2021, Federal Reserve Chairman Jerome Powell said, “[T]hese one-time increases in prices are likely to have only transient effects on inflation.” From then on, “transitory inflation” became the phrase of the year in economics, with high hopes that once the initial supply chain shocks and government stimulus after the onset of the pandemic wore off, inflation would return to its regular scheduled programming and maybe even deflate.

It turns out, however, that trillions of new dollars in stimulus and slashing interest rates to near-zero for a prolonged period of time did not make inflation “transitory.” Instead, it became a new chapter for the economy.

But in this article, I want to talk about what I’m calling “transitory mortgage rates.”

What Are “Transitory Mortgage Rates”?

Transitory inflation is defined as an inflation rate that moves above its typical rate for a short period, with the expectation that the rate will revert back to its typical rate. It’s the opposite of persistent inflation, which is what we’ve experienced over the last two years and forced the Fed to raise interest rates in the manner that they have.

Mortgage rates, while highly influenced by the federal funds rate, are subject to their own fluctuations and usually follow the trajectory of bond yields. With that in mind, how could they be in a transient state right now?

Given that the federal funds rate has remained at 5.25-5.5% for the last few months, and the average 30-year mortgage rate has decreased by over 1% since October. By the transitory definition, mortgage rates are reverting to their base naturally after a period of higher rates. Add in that the higher-than-normal spread between bond yields and mortgage rates has also started to decline, and there might be some runway for mortgage rates to keep decreasing even without the Fed cutting rates.

By how much, though? 30-year mortgage rates tend to be within 1-2% higher than 10-year Treasury bills. Today, the spread is around 2.7%. While there are a number of factors that influence the spread, if we’re looking at this from the most basic of lenses, it could mean that there’s still room for mortgage rates to fall anywhere from 0.7% to 1.7% without lowering the federal funds rate. If that were the case, then the current 30-year mortgage rate average of 6.67% could drop to as low as 5%. 

If we look at the decade leading up to 2020 and the pandemic, the average 30-year mortgage rate ranged between 3-5%. If mortgage rates were to continue falling and revert back to their typical spread, then it would effectively be a “transitory mortgage rate.” A rate that was higher than its base rate for a short period until it naturally reverted to its base. 

Does This Change If The Fed Will Lower Rates?

Low interest rates are great for expansion, but economies run the risk of overheating with prolonged easy money policies. Inflation increased at a ridiculously high rate for the greater part of two years. We saw home prices reach record highs, gas prices rise, costs in grocery stores rise, and more. In short, whether mortgage rates drop organically or not, it doesn’t change the Fed’s decision-making. They’re looking at inflation and unemployment.

While the Fed was late to the party in raising the federal funds rate, the hikes were necessary to defeat inflation. The latest inflation data shows that personal consumption expenditures (PCE) dropped to 2.6% in November, which is great progress, but would a premature rate cut make that number tick back up? 

The Fed has to make a decision in 2024. They either let rates stay steady and risk a slowdown that’s more painful than intended. Or lower rates and risk overheating the inflation rate all over again. The latter is easier to stomach but certainly a concern. The Fed would be happy to see the mortgage rates fall on their own, but it’s also important to keep in mind that the sole purpose of the Fed is to control inflation and unemployment, not the cost of housing.

For us, lower mortgage rates and low inflation are a good combination. If the Fed can hold off from lowering rates and keep inflation controlled while we continue to see a decline in mortgage rates, then there’s not much to complain about. We’ll just have to see what happens.

More from BiggerPockets: 2024 State of Real Estate Investing Report

After more than a decade of clearly favorable investing conditions, market dynamics have shifted. Conditions for investment are now more nuanced, and more uncertain. Download the 2024 State of Real Estate Investing report written by Dave Meyer, to find out which strategies and tactics are best suited to win in 2024. 

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

Choosing a real estate investment strategy can be challenging. There are risks no matter what avenue you choose, but understanding all options, including a ground lease, is important.

A ground lease can be a good option for landlords or property owners who want prime locations, but not understanding what a ground lease is and how it works can be detrimental.

We’ve broken down everything there is to know about the ground lease and what landlords and tenants must consider.

What Is a Ground Lease?

A ground lease is different from any other type of lease. With a ground lease, the tenant owns the building but not the land. The land is undeveloped, and when a tenant leases it, they have the right to develop it while the lease is in effect.

Ground leases typically have very long terms, sometimes as long as 99 years, because when the lease expires, the land and any improvements (including buildings) go back to the owner. Tenants make regular rental payments to the landlord like they would if they rented the building.

Ground Lease Terms and Title

Tenants need to pay attention to the ground lease terms, just as they would the terms to purchase land or property.

The term is essential because they want it at least as long as it takes to recoup the cost of construction or improvements made to the building.

Just as important, however, are the title terms. Even though tenants aren’t buying the land, the title agreement is essential. At a minimum, they should purchase a title insurance policy to protect their leasehold interest in the land.

When signing a ground lease, tenants should consider the following for title commitments:

• They should receive all appendices to the title.
• The grantee on the title’s name should exactly match the name of the landlord to prevent legal issues.
• Ensure the title premiums are paid and the leasehold title policy is executed.
• Determine if any existing loans must be subordinated to the ground lease.

The Benefits and Drawbacks of Ground Leases

Ground leases offer benefits for both the lessee and the lessor.

Lessee benefits

• Can build in a prime location: Tenants have a greater chance of building in a prime location because they don’t have to worry about purchasing the land. A ground lease is much more affordable than buying land, allowing them more options.
• Lower out-of-pocket expenses: Since tenants don’t need money to put down on the land, they may be able to utilize more land or have more money for construction and improvements.
• Lower tax burden: Ground lease rents may be tax deductible for business owners, lowering their tax liability.

Lessee disadvantages

• May be restricted: Without owning the land, tenants may need to ask permission or get approval for any improvements or changes. This can be burdensome and may limit what they can do.
• Losing the improvements: If the tenant doesn’t extend the lease upon expiration, they lose any improvements made to the land to the owner.
• Tax and insurance are the tenant’s responsibility: Tenants are responsible for all taxes, insurance, and maintenance costs.

Lessor benefits

• Retain control: Depending on how landlords write the lease, they may be able to keep control over the improvements on the land to avoid any unnecessary issues or undesirable improvements.
• Regular income: Landlords can benefit from the steady income of a ground lease without the hassle of making the improvements themselves. Landlords may also include an escalation clause so the rents increase with market rents.
• Retain ownership of the improvements: When the lease expires, landlords get ownership of all land improvements unless the tenant extends the lease.

Lessor disadvantages

• Strict wording is necessary in the lease: Without proper counsel, landlords could easily be taken advantage of if they don’t have control over the improvements made to the property.
• Rent is taxable income: The income received from ground rents can significantly increase the landlord’s tax burden. 

Ground Lease Negotiation Considerations

When negotiating a ground lease, lessees should consider the following:

• Request Right of First Offer to give you options if the landlord wants to sell.
• Clearly state how the improvements will be handled at the end of the lease term, including if the tenant is responsible for destroying them.
• Determine how market rents will be determined, whether based on current use of the property or highest-and-best use (current use is more favorable).

Role of Ground Leases in an Investment Strategy

Investors who want to diversify their portfolio can invest in ground leases. As tenants build on the property, it will increase the property value, giving them even more profits when they sell the land or take possession of the improvements upon lease expiration.

Of course, like any investment, there aren’t any guarantees. Landlords should ensure they have an escalation clause to charge higher rents as the market dictates, and there’s always the risk of bad tenants defaulting on their leases.

Final Thoughts

A ground lease can be a good way to diversify your portfolio or to have land for your property without coming up with capital. Understanding the nuances of the lease and being properly protected with the support of an attorney is essential.

Get the Best Funding

Quickly find and compare investor-friendly lenders who specialize in your unique investing strategy. It’s fast, free, and easier than ever!

Bill Shopoff, Shopoff Realty CEO, joins ‘Closing Bell Overtime’ to talk the state of real estate and his playbook for 2024.

The Neighborhood Assistance Corporation of America (NACA) offers an incredible mortgage program that makes homeownership more affordable. Eligible borrowers can expect no down payment or closing costs, attractive terms, and hand-holding throughout the entire process.

Here’s everything you must know about the NACA mortgage.

What Is a NACA Mortgage?

The NACA Mortgage program helps thousands of people purchase homes every year. They offer below-market mortgage rates and financial counseling programs to help more people take advantage of homeownership. 

The program is available as a 15-, 20-, or 30-year mortgage and is termed the “Best Mortgage in America.” Members can use the program on virtually any property type, including single-family, condos, co-ops, multifamily, and mixed-use properties.

The average number of days to close on an NACA Mortgage is just 2, and their foreclosure rate is 0.00012%. All borrowers get the same terms with an NACA Mortgage, no matter their credit scores or financial situation.

Bank of America is the NACA Mortgage’s largest partner, providing a majority of the funding for the program. NACA has partnered with Bank of America for more than 25 years to offer the program.

How Does a NACA Mortgage Work?

The NACA Mortgage is meant for low-to-moderate-income earners and to fill low-to-moderate-income areas. They call these Priority Members and Priority Areas, respectively.

To be a Priority Member, your total income must be less than 100% of the Metropolitan Statistical Area’s (MSA) median income. If your household income exceeds this amount, you must purchase a home in an area with a median income below the MSA.

To be eligible, you must:

• Not have ownership of other properties
• Live in the home for the life of the NACA Mortgage
• Participate in activities that promote economic justice, completing at least five a year, with one occurring before qualification and another before you close
• Follow the NACA terms of membership
• Have enough funds for the earnest deposit, home inspection, and prepayment of property taxes and insurance
• Have proof of reserves of one month of mortgage payments if your payment will increase by $300 or less with the new home and two months if Payment Shock Savings exceeds $300

How to apply

To apply for an NACA Mortgage, you must do the following:

• Attend an NACA Homebuyer Workshop.
• Become an NACA member.
• Provide your qualifying information.
• Work with an NACA counselor to determine eligibility.
• Attend a Property and Purchase Workshop.
• Find a property, and all parties must sign a sales agreement.
• Satisfy any mortgage conditions, including providing updated income documentation.
• Work with your loan officer to finalize the loan.
• Close your loan.

Benefits of NACA Mortgages

The NACA Mortgage program has unique benefits other loans don’t offer, including:

• No down payment required
• No closing costs
• Doesn’t require mortgage insurance
• Has competitive interest rates
• Doesn’t have any hidden fees (only the $25 membership fee)
• Sellers can provide up to 10% of the sales price to help with interest rate buydown

Disadvantages of NACA Mortgages

• Not everyone qualifies
• No option for construction loans
• Borrowers don’t have equity in the home
• Limited to NACA-eligible areas

NACA Mortgage vs. Traditional Mortgage

The NACA Mortgage has much more relaxed guidelines than a traditional mortgage. The program also doesn’t require a down payment or have any closing costs. Traditional mortgages, such as FHA loans, often have higher interest rates and more fees.

Also, unlike FHA loans or conventional loans with less than 20% down, NACA loans don’t require mortgage insurance. This may save you several hundred dollars a month and thousands over the mortgage term.

The NACA Mortgage is often even better than a VA loan because there are no closing costs or upfront fees, like VA loans charge. NACA loans often have lower interest rates too.

The NACA Interest Rate Buydown

The NACA Mortgage program offers competitive interest rates, but it enables members to secure an even lower rate with the interest rate buydown program.

To lower your rate, you can use your own funds or funds from the seller or a grant to buy down the interest rate. The buydown cost is the same for all members. Paying 1.5% of the loan amount lowers the rate by 0.25% for 20- and 30-year terms, and 1% lowers it to 0.25% for 15-year terms.

Does the NACA Allow Refinances?

Unlike traditional mortgages, the NACA doesn’t offer a refinance program. They strongly feel it’s better to modify an unaffordable mortgage than refinance and pay more out of pocket.

Final Thoughts 

If you don’t own a home and your household income is less than 100% of the MSA’s median income, the NACA Mortgage may offer benefits you wouldn’t see with any other program. 

If you don’t qualify, there are other options, such as down payment assistance programs or even FHA loans, but you’ll need more money out of pocket than NACA loans require.

Get the Best Funding

Quickly find and compare investor-friendly lenders who specialize in your unique investing strategy. It’s fast, free, and easier than ever!

Many people dream of investing in real estate, but most never take the first step. If you want to get started in real estate investing, there are six actionable steps you can take today.

Step 1: Define Your Goals

No two real estate investors have the same goals. While one investor has an interest in flipping homes, another wants to invest heavily in rental properties. 

Define your goals based on your financial situation, risk tolerance, and long-term investment strategy.

Step 2: Educate Yourself on Real Estate Investing

There’s no such thing as having too much knowledge of real estate investing. The more you learn, the more confidence you’ll have in getting started. 

At BiggerPockets, we have all the resources you need to educate yourself. This includes our blog, boot camps, guides, bookstore, and podcasts. 

As you educate yourself, pay extra attention to market trends, successful investment strategies employed by experienced investors, and how to best use your knowledge and money to your advantage.

Step 3: Network With Experienced Real Estate Investors

You can read as much as you want about real estate investing, but there’s no replacement for networking with experienced real estate investors.  There are many benefits of doing so, including but not limited to:

• Gain practical insights: Learn from the real-life experiences and challenges faced by seasoned investors.
• Expand your professional network: Build connections that can lead to partnerships, mentorship, and investment opportunities.
• Stay updated on market trends: Keep abreast of the latest market developments and investment strategies.
• Access to resources and opportunities: Discover new resources, tools, and potential investment deals through your network.
• Receive support and advice: Benefit from the guidance and advice of experienced investors.

The BiggerPockets forum is full of networking opportunities, discussions, guidance, advice, and more. 

Step 4: Choose a Specific Real Estate Investing Strategy

It’s one thing to say that you want to invest in real estate. It’s another thing entirely to do so with a purpose. Your success is based largely on your ability to choose the right investing strategy.

Some of the most commonly used real estate investing strategies include:

Learn as much as you can about each specific strategy to determine which one is best for you as a beginner. 

Step 5: Market Research

There’s no replacement for in-depth market research. It’s a risk to invest before you know the ins and outs of your market. At a minimum, your research should include the following:

• Local economic trends: Understanding the economic health and growth prospects of the area.
• Property values and trends: Tracking the changes in property values over time.
• Rental market dynamics: Assessing the demand for rentals, average rents, and occupancy rates.
• Local laws and regulations: Being aware of zoning laws, rental regulations, and tax implications.
• Neighborhood characteristics: Evaluating factors like safety, amenities, schools, and future development plans.

Step 6: Assemble Your Team

You’re only as good as the team you build around you. Here are the types of professionals you need on your side:

• Real estate agents: They provide valuable market insights and help in finding the best investment properties.
• Lenders: Crucial for securing financing options tailored to your investment strategy and financial situation.
• Tax and financial service professionals: Offer guidance on tax implications and financial planning to maximize your investment’s profitability.
• Property managers: Essential for managing the day-to-day operations of rental properties, ensuring tenant satisfaction and property maintenance.
• Contractors: Their expertise is vital for property renovations and repairs, impacting the value and appeal of your investments.
• Professional services: Includes experts like appraisers and surveyors, who provide information for informed investment decisions.
• Legal team: Important for navigating real estate laws, contracts, and legal disputes, thus protecting your investments legally.
• Wholesalers: Provide access to off-market deals and potential investment opportunities at lower prices.
• Insurance: Protects your investment properties against risks and unforeseen events, which secures your financial interests.

Your Journey Begins

Now that you know the basics of how to get started in real estate investing, you’re no longer lost and looking for answers. When you’re ready, take the first step on your journey—you won’t regret it!

Ready to get your first property in 90 days?

When you’re a rookie, real estate investing can seem overwhelming. This comprehensive guide gives you everything you need to buy your first property within 90 days!