People are always looking for a profitable investment. This description fits real estate as an investment option.
Over the years, the property has stood the test of time against different investment options. Compared to stock, bonds, and even cryptocurrency, a rental property provides stable, monthly returns, an appreciation in value over time, tax advantages, and absorbs shocks in the economy quite well.
That said, if you’re looking to invest in real estate there are several calculations you need to make to ensure that it will be fruitful. In this article, the reliable team from Realty Management Associates will explain how you can calculate your property investments ROI.
What is Return on Investment, ROI?
The financial measure is used to determine the profitability of your real estate investment. ROI is not only used by investors, but it also helps bankers, lenders, and other interested parties assess a potential owner’s purchase.
Since the dynamics of its calculation can be replicated, an investor can use it to compare different potential property investments. You can also use it to compare it to other types of investments.
Property Information You Need
To make an accurate ROI calculation, you will need to collect information about the property.
You will need the following:
- Property Information – You will need to know the cost of acquisition of the property. If a property appraisal had been done recently, you can request this information from the owner of the property. Also, ask for information on the number of bedrooms/ bathrooms and square footage.
- Mortgage terms – From the information provided by the owner, get to know how much is paid to the lending company.
- Rental Income – The typical property has more than one avenue of bringing in income. Apart from the rental income, the owner could be enjoying additional income from vending machines, charging a parking and storage fee, and more. Inquire about rent rates and additional streams of income.
- Rental costs and expenses – To keep the property running, frequent repairs and maintenance need to be carried out. There are also payments to the utility company, HOAs, and management service providers. You would also need to consider any unpaid rent.
- Permits and licenses – To operate the rental, licenses need to be paid to the county offices. There are also insurance and property taxes that will need to be paid. These are often annual payments.
Some of this information is not readily available. You might need to get in touch with your local real estate professional who can advise you on how to proceed. Having this information will help to accurately calculate your ROI.
The Calculation
With the property information that you have received from the owner and other property professionals, you can start on the calculations. You will need to derive some numerical figures before arriving at the final figure. Here are some of them:
- Gross Income – This is the total amount of income that can be accrued from the property. It can either be on a monthly or annual basis.
- The Net Operating Income – Also known as NOI, this is calculated by subtracting a property’s repairs and operating expenses from the Gross Income.
- Annual Cash Flow – Though it’s not required in the calculation of the ROI, it’s important to know whether the property is returning a profit or generating losses. You calculate the annual cash flow by subtracting the debt from the net operating income.
Once that’s done, you now have all the information and numerical figures to calculate the ROI.
An Example
Let’s say that you purchase a property that’s a two-bedroomed bungalow at $100,000. The house needed some repairs and renovations to match up to the newer competition in the market. You spent another $50,000 on property repairs. When you put the property on the market, you were able to sell the property for $200,000.
For the ROI rate, you want to take the Net Income and divide that by the Cost of the Investment then multiply this by 100 to get a percentage.
Investment Goals
What constitutes a good ROI for your property? From our experience in the property industry and compared to other sectors of the economy, anything above 10% is a good return.
You must also remember the common economic principle, the greater the rewards, generally speaking, the greater the risk. With this in mind, it’s best to assess the level of risk you’ll make when investing.
At the end of the day, you need to keep in mind that an investment is a personal choice. It is unique to each investor since each one has different financial capabilities and goals. All this and more must be considered before finalizing which property has the best ROI for you.
Bottom Line
From the information provided above, you can appreciate the technical nature that comes with property investment. And this is just the tip of the iceberg. For your real estate investment to flourish, you will need management expertise, industry knowledge, and local contacts. Trust in the leading property experts in the Greater Boise Metro area.
Realty Management Associates is the top-rated service provider, known for its comprehensive property solutions in Boise, ID. We have advised property investors on how best to proceed with real estate purchases and we’ve helped them manage their rentals. Our goal is to help real estate investors maximize their ROI in a stress-free manner.
Get in touch with us today and request a quote for our services. Our experienced property managers are willing and ready to offer their services!