Real estate has long been considered one of the most reliable ways to build wealth. But owning property alone doesn’t guarantee building wealth or strong returns. The difference between a standard investor in real estate and a high-performing one is the strategy that they have created. 

If you are looking for ways to increase your return on investment (ROI) on your real estate properties, you need to optimize the different stages of the property ownership journey. Starting with acquisition, all the way to tax planning. 

The market today is extremely competitive, so even the smallest of adjustments, if strategic, can significantly and positively increase your profits. To help you on your journey, here are some practical tips to help you maximize your real estate ROI without taking costly or unnecessary risks. ​

What does ROI mean in real estate?

Before you can work towards a strategy that will improve your returns, it is important that you know what ROI means and define what they are correctly. 

ROI in investment in real estate is generally measured by the annual profit that is generated by a property, in comparison to the total cash that you invested in the property. 

It will include a variety of factors, including: 

• Rental income
• Tax
• Appreciation
• Operating costs
• Expenses
  
  

Many investors will only look at the rental income on their property. If you want to work smartly, then you need to look at the full financial picture, no matter how small or insignificant some of the costs may seem.

Chasing higher rent alone isn’t going to improve your ROI, nor is it the most strategic thing to do. A good strategy will include improving efficiency, reducing waste and leveraging strategic advantages. ​

Buy the right property 

The most impactful ROI improvement strategy is the one that happens before you even start collecting the rent from tenants. It starts with the property that you purchase. 

Start by focusing on below-market opportunities. When purchasing an investment property, consider things like motivated sellers, off-market deals, underperforming rentals, properties with cosmetic issues and other opportunities. 

If you can find a property that you can purchase below market value, then you can instantly increase equity from the start and lower your cost basis. This boosts long-term returns and gives you some breathing room due to a good margin. 

Learn to analyze cash flow 

Many people will make the mistake of underestimating or overestimating expenses with an investment property, which can very quickly destroy their ROI. Make sure you consider the best and worst-case scenarios for each cost that is involved in your property investment. This will help you to create the right buffer of funds to suit any fluctuations and unforeseen issues.​

Strategically increase rental income 

Raising rent is the most obvious approach, and is typically the first thing that people do. However, when you jump into this tactic without a proper strategy or intention, you can quickly alienate your tenants. Maintaining a good relationship with your tenants is key. In order to find the right balance, consider how you can add value-based upgrades to the property, as well as offer premium add-ons. This may include things like updated lighting, modern fixtures, fresh paint and flooring, reserved parking, pet fees, and furnished units. 

Tenants can then see what they are paying more for. Focus on the kind of updates around the property that have a strong cost-to-value.​

Reduce your operating expenses

Operating expenses are commonly unnecessarily high. This is a really great area of your investments to review. When trying to increase ROI, it isn’t always about ways to add more income, but how you can reduce unnecessary expenses so that your net income can be improved. 

Some simple yet effective things that you can do include:

• Reviewing and renegotiating your service contracts on a regular basis, including things like insurance, maintenance contracts, landscaping, pest control and more
• Carry out regular inspections and preventative maintenance to save money rather than deferring them, and turning them into larger, more costly problems 
• Improve the energy efficiency of your property by upgrading things like LED lighting, thermostats, smart appliances, and more to help reduce utility costs and increase tenant appeal
  
  

Reducing your operating costs can be extremely effective, as long as you don’t cut corners. Make sure all cuts are justified and only seek to make improvements. ​

Improve tax efficiency to boost your net returns 

Taxes are vital to property investments, but often overlooked in the context of ROI. When you learn more about real estate and become a serious investor, you can benefit from certain tax advantages, including depreciation. Under current tax laws, certain components may qualify for accelerated depreciation. Educational resources on bonus depreciation can be a huge help on your journey, as it can explain how it works and how investors can determine whether their property qualifies for accelerated deductions. You also have the use of tools to support you. 

When you are more informed and take strategic action with your tax planning, you can increase your first-year deduction, improve short-term cash flow and offset other passive income. It is vital that you always consult a professional before implementing any tax strategies, to ensure you stay within the legal lines and do what is best for your investments. Wrong moves when it comes to tax can be extremely costly. ​

Optimize property management

Poor management can quietly and negatively impact your returns. Whether you manage your properties yourself or you use a property manager, there is always room for optimization and improvement. 

If you manage your properties yourself, then consider:

• Thoroughly screening your tenants 
• Quickly responding to issues that arise
• Organize all your documents meticulously 
• Consistently and efficiently enforce lease terms
  
  

If you use a management company for your property management, then consider: 

• Annually evaluating their performance
• Compare the quality of service to the management fees you pay 
• Ensure they minimize vacancy time 
  
  

It isn’t luck or substantially increasing rent that will help you to improve the ROI on your investment properties. It is about being more intentional and making smart decisions at different stages of your journey.