If you’re considering implementing rental deposit alternatives, you will understandably want to know what this means for your ROI. This article will review several case studies to demonstrate what rental deposit alternatives can mean for your ROI on rental property.
Factors that Influence Rental Property ROI
Before we discuss the case studies today, we’ll cover some fundamental details about Canadian rental property ROI.
Here is a list of the most significant factors that influence rental property ROI, for better or for worse:
- Mortgage terms
- Location (including proximity to schools, green spaces, and shopping centers)
- Valuation
- Property condition and age
- Vacancy rates
- Local crime rates
- Property type
- Neighbourhood desirability
- Operating expenses (including maintenance and property taxes)
- Appreciation
- Property size (including the number of bedrooms and bathrooms)
What is a Good ROI on Rental Property in Canada?
Rental property investments in Canada have varying rates of returns. They differ not only from city to city but also from one property type to another. The factors listed above will each play a big part in determining your rental property’s return on investment (ROI).
Generally speaking, however, a good ROI on rental property is between 8-12%.
How to Calculate ROI for a Rental Property
Calculating ROI for any investment generally follows a straightforward formula:
Gain on Investment – Cost of Investment ÷ Gain on Investment = ROI
However, you must also account for certain variables for rental properties, including whether you buy them with cash or finance them and whether you include home equity.
Cash Purchase
ROI is calculated by dividing your net profit by your total investment.
For instance, if you purchase a property for $120,000 (including all costs) and net $10,200 in a year, your ROI is 8.5%.
Financing
A financed transaction is a more intricate calculation because the mortgage amount and down payment must be factored in.
Let’s say acquiring a property requires $34,000 out-of-pocket expense and generates $5,600 in annual profit. The ROI would be 16.5%.
Including Home Equity
Some investors also add the equity built up in the home (the difference between the market value and the loan outstanding) to the ROI calculation. This has the effect of substantially raising the ROI.
In this case, we’ll say the equity in the property listed above is $1,500; adding these ($5,600 + $1,500) lifts the ROI to 20.9%.
Vacancy Rates, Rental Deposit Alternatives, and ROI
As we’re about to demonstrate, offering rental deposit alternatives can positively influence your ROI.
According to a study by the National Multifamily Housing Council, rental properties with more flexible rental deposit options tend to experience lower vacancy rates than properties requiring traditional cash rental security deposits.
Rental deposit alternatives appeal to many renters, and offering this option can attract more potential tenants. This means lower vacancy rates and a higher likelihood of having your property occupied for a longer period of time.
By offering rental deposit alternatives, you might also be able to increase rent prices, thereby increasing your ROI.
Here’s an article you don’t want to miss next: Deposit Alternatives: The Future of Renting in Canada.
Case Studies: Rental Property ROI and Rental Deposit Alternatives
Now, we’ll turn our attention to a few examples of the real-life impact deposit alternatives can have.
Increased Revenues from Unpaid Rent Collection
Increased occupancy rates can lead to higher ROI for property managers.
Rental deposit alternatives can reduce the financial burden on renters, making rental properties more attractive to potential tenants and leading to increased revenues from rent collection.
According to Multifamily Dive, some properties were able to see a 72% recovery rate on delinquent payments using rental deposit alternatives.
Reduced Operating and Administrative Costs
Using rental deposit alternatives can also lead to reduced operating costs for operators, including administrative costs.
Properties using rental deposit alternatives had lower administrative costs compared to properties using traditional security cash rental deposits, given reduced trust account administration, physical deposit cheque handling, and debit and credit payment reconciliation issues.
A report by Assurant found that properties using traditional cash rental security deposits experienced a $50-$100 long-term cost associated with each deposit. By using a rental deposit alternative, these expenses can be avoided.
A National Real Estate Investor survey also found that rental deposit alternatives can help reduce costs associated with tenant turnover, including cleaning, repairs, and advertising expenses.
Learn more about the benefits of security deposit alternatives here.
Higher Equity Saved with Rental Deposit Alternatives
Properties using rental deposit alternatives had vastly lower move-in costs than traditional cash rental security deposits.
RealPage reports that rental security deposit alternatives can help reduce the upfront cost of moving by up to 300% for residents.
For instance, a tenant planning to move into a property where a cash deposit is required would often need to pay a security deposit of one or two months’ rent at the outset.
Using a rental deposit alternative, the same tenant could potentially pay significantly less, ranging from a small monthly fee to a one-off non-refundable payment.
This significant drop in initial costs could make the property more appealing to prospective tenants while allowing them to save or use their funds in other ways.
Increased Asset Value
Finally, rental deposit alternatives can help increase the overall value of rental assets by reducing vacancy rates, increasing revenues, and reducing operating costs.
In a study by the Urban Land Institute, properties that offered rental deposit alternatives were found to have a higher market value than properties that utilized traditional cash rental security deposits.
Learn More About Rental Deposits Now and Rental Property ROI
Rental Deposits Now has made it our mission to rid the world of security deposits, electrifying the customer experience and increasing the ROI of our partners.
Are you eager to boost your rental property ROI and maximize your investment? Book a demo with Rental Deposits Now to learn more.
