Chicago is one of the ripest markets in the U.S. for real estate investors, and that's no secret. According to research from RentCafe, 54% of Chicago's households are renter-occupied. For comparison, the national ratio is 34% of households occupied by renters. That's a whole lot of rental property!

Don't start drooling just yet though. Whether you're new to the real estate investment game or have been around the block a few times, it can be easy to get in over your head here. With all of the rules and regulations in Chicago, it can be easy to miscalculate your true income and not make the profits you want to see on your rental property investment.

So how can you get a true read on your potential rental profits and go into your real estate investment confidently? GC Realty & Development has been on every side of this equation, and we're here to cover the basics for you on profit potential with rental properties.

How Much Profit Should You Make on a Rental Property?

Before you can determine if a Chicago rental property has the right potential, you have to understand how to calculate profits for a rental business. This is going to look very similar to how it's done in other businesses, albeit with some special considerations.

Gross Rental Income vs Expenses

It all starts with gross rental income. This measures the total amount of monthly rent you collect from your tenants each month. This is going to be calculated based on the market rates for the area your property is in and multiplied by the number of units you're renting out. But as you know, revenue is far from the bottom line of your rental income.

Next comes the hard part: operating expenses. These monthly expenses come in a lot of shapes and sizes for real estate investors. The most common include:

• Mortgage payments
• Maintenance costs
• Insurance
• Taxes
• Property management fees
• Marketing costs

Once all that is estimated for your rental property, you deduct the operating expenses from your gross income, and voila. You have a monthly expected rental income.

You can't stop there though. Unexpected expenses happen, tenants move out unexpectedly, and rent rates can change which impacts your monthly income.

To get a real measure of how much profit you're generating, you have to adjust your practices regularly. This relies on accurate and detailed financial reporting. Staying consistent throughout the year brings you to your cash flow.

Measuring Rental Property Profitability

The cash flow of a rental property measures the total amount of positive (or negative) money that a rental property generates in a year. This puts your total revenue against all of your pre-tax expenses to show your net operating income.

Having an accurate read on your annual cash flow is key to determining your return on investment (ROI). Two popular ways to measure this are cash-on-cash return and capitalization rate (cap rate).

A cash-on-cash return measures the yearly return on an investment property based on the cash invested and the net operating income. The cap rate of a rental property is the ratio of net income to the purchase price of the property.

While the cash flow of rental properties is important, many investors focus too much on this aspect and overlook other aspects that give a property value. Don't be one of those rental property owners.

You can gain more real estate investor knowledge outside of cash flow here.

Evaluating Investment Property Opportunities

So you've found a few options for Chicago real estate. But how can you tell what the property's ROI will be? That's certainly not something you'll find on the listing.

There are several factors to consider when trying to get a read on the profitability of a rental property. The purchase price is the first and most obvious, as you have to make sure the investment isn't breaking the bank for you. Down payment and mortgage payments are the first things cutting into your bottom line.

Property type and location are equally important. No matter how long you've been a real estate investor, you've probably heard by now just how important location is. It impacts everything about your cash flow.

However, don't think that just because a property is in a nicer neighborhood with higher rental rates it will generate a higher cash flow than one with lower rates or that needs renovation. Sometimes that property with higher rent can cost you more in expenses in the long run.

That's why it's important to consider every factor when evaluating the cash flow and ROI of a rental property. We offer an ROI calculator on our website for rental property investors to use when judging real estate investments.

Managing Expenses to Increase Profit

Rental property expenses are unavoidable, but the wise investor is consistently evaluating these expenses to maximize their cash flow in the long run. You or your property management team must keep accurate monthly records of these expenses to find places where you're overspending and regularly adjust costs based on market trends. This is equally important when it comes to property taxes.

Rental Property Taxes and Deductions

It’s crucial to differentiate rental property profit from taxable net income. Landlords can claim additional non-cash deductions, such as depreciation or maintenance costs, to reduce their taxable income and increase cash flow. Property taxes are complex, and there are many tax benefits you could be missing out on if you don't keep a record of every bit of money going out of your business.

The 1% Rule

A common rule of thumb for real estate and cash flow is the 1% rule. The 1% rule proposes that the monthly rental income of a property should equate to 1% of the total purchase price. If market prices are lower than this or seem unreasonable, the investment might not be worth it.

Just like with cash flow, however, don't live and die by this. Outside factors such as property appreciation can change the viability of rental properties in the long run. Markets fluctuate and the profitability of a property can change with it.

Key Takeaways for Maximizing Rental Property Profit

Understanding the financial implications of owning a rental property is crucial for running a sustainable, profitable, and professional rental business. You have to leverage everything at your disposal and not get stuck focusing on short-term gains.

Long-term financial freedom is the goal, and that's what GC Realty & Development prioritizes when it comes to property management. We'll ensure you have a healthy cash flow on your investment while not losing sight of all the outside factors that are key to long-term success.

Reach out today and get a free consultation on your Chicago property.