When finding the best return on investment real estate, learning the technique of calculating return on investment (ROI) is vastly important. An investor, regardless of the profession, will use this formula to understand if an investment a wise decision. The computation of ROI works just as well in real estate as it does in the stock market. It is a profitability ratio that measures performance, determining how effectively and efficiently dollars are being used to generate a profit. In finding the best return on investment real estate, using this technique can help show how well an investment, can performance singly and when compared to others.
Finding the best return on investment real estate starts with identifying the right moneymaking opportunities. These opportunities are found by being able to pinpoint mispriced, under market value, and distressed properties. For example, reaping the benefits in an owner not knowing what their home is worth. Therefore, being able to turn around and sell it for a few quick bucks or hold it long-term with an even greater ROI. Finding the best return on investment real estate involves purchasing wholesale properties verse retail. For example, taking on a distressed property that needs more work than most people are willing to put in. The advantage in doing this is that these homes typically have better ROI’s.
To understand the return on investment real estate rental properties, one must have a grasp on the market and how much a home can rent for. Nobody wants to purchase a rental property for $250,000 and only be able to rent it for $900 per month. It is also equally as important to know what the house is worth after the repairs are done, so you do not end up overpaying for the property. For example, if you purchase a house for $100,000 and put $50,000 into the property, but the house is only worth $140,000. You are already upside down. When calculating the return on investment real estate rental properties you want to make sure the numbers make sense to where you are able to pay off any bills (insurance, taxes, utilities) and still leave money in your pocket at the end of each month/year.
A common question for those interested in investing and finding a favorable ROI is, “how much do you need to invest in real estate”. It really depends on the individual and what they are looking for from their investment, so the answer is valued on a case-to-case basis. For example, if Real Estate Kate’s client Joe is comfortable with a lower ROI because he prefers a lower risk investment, he may consider buying a large apartment complex. This investment requires a large amount of money and therefore Joe will need to have a big chunk of change up saved up for the purchase. So, when planning out “how much do I need to invest in real estate”, consider what type of ROI you desire. Do you want a cheap cash cow? Would you rather a high-end rental that has a lower return, but clientele may stay for 2-5 years? Weight the pros and cons, calculate the ROI, and find out which investment works best for you!
To learn about how to get involved in investment real estate, read “What is the Best way to Invest in Real Estate”
Since Real Estate Kate deals primarily with cash buyers, take a look at following example from Investopedia article’s “How to calculate the ROI on a rental property” to help explain how to calculate ROI.
ROI = (gain from investment – cost of investment) / cost of investment
Here is an example of a rental property purchased with cash:
- You paid a $100,000 in cash for the rental property.
- The closing costs were $1,000 while remodeling costs totaled $9,000 bringing your total investment to $110,000 for the property.
- You collected $1,000 in rent every month.
A year later:
- You earned $12,000 in rental income for that year.
- However, there were expenses including the water bill, property taxes, and insurance totaling $2,400 for the year or $200 per month.
- Your annual return was $9,600 for the year ($12,000 – $2,400).
To calculate the property’s ROI:
- Divide the annual return ($9,600) by the amount of the total investment or $110,000.
- ROI = $9,600 ÷ $110,000 = 0.087 or 8.7%.
- Your ROI was 8.7%.