Relevant Tips on How to Calculate ROI on Investment Property

Investments will always be one of the surest ways to multiply your income, and real estate, particularly rental properties offer the safest means to earn extra income. Appreciation over the long term, leniency in taxes, and guaranteed cash flow every month is why most rental property investors opt for this form of investment.

Many people have identified getting the right property and if it will pay off in good time as some of the challenges they face while investing in real estate.  We’ve compiled these tips on how to calculate an investment property’s ROI to help you.  

The ROI is an accounting formula that describes how much profit has been made from an investment. Calculating ROI on rental properties can help you determine how much you can gain as profit in rent over a long period. This return is expressed as a percentage. You can also access more information on rental properties’ ROI by checking https://theshorttermshop.com/roi-rental-property/.

Different Types of Properties to Invest In

If you’re a newbie in the rental investment business, there are lots of properties to start your investment journey with, such as duplexes, townhouses, single-occupant, and family occupant homes.

A major advantage is that you can choose whether you want the rental on a short or long-term basis, from six months to a year. You can also collect rents monthly.

How to Get ROI on a Rental Property

Let’s get down to how to calculate the ROI on a rental property. There’s a formula to give you a quick percentage of what to expect:

ROI = (Profit on Investment – Costs incurred) / costs incurred

Say you made an investment of $100,000 for a rental property, and after 3 years, you sold it for $220,000, your ROI will be:

(180,000 – 100,000) / 100,000 = 0.8

The ROI for that property is 80 percent. Alternatively, you can make use of a dedicated investment property calculator to take away the stress.

The ROI for a rental property doesn’t rely solely on the buy and sell price. Some factors involved in closing a house must be included to get the real-time figure. Miscellaneous figures like closing costs, renovation expenses should be considered. 

Suppose you hired a property manager, the wages should also be included before calculating the ROI. 

Once these extra fees have been determined and laid out, calculating the ROI on an investment property will be dependent on the mode of payment for the property. 

You can either get a rental property by financing it or paying only cash.

ROI on Financed Payment

A financed sale involves going to the banks to finance the project. You’ll need to include the mortgage costs while calculating your ROI.

Assuming the purchase price is $100,000 and the property is sold for $180,000 after 4 years. The calculation will be:

Initial price: $100,000 

Part-payment: $25,000

Price sold: $120,000

Profit made: $20,000

Mortgage payment: $3,025

Tax cash flow deductions: $6,000 from rentals, which is 6,000 – 3,025 = $2,975

After 4 years, $2,975 x 4 = $11,900

Then include the $20,000 as profits for final sale. 

$20,000 + $11,900 = $31,900

ROI = (31,900 – 25,000) / 25,000 = 27.6 percent. 

ROI on Cash Payment

Going with the parameters set for the financed payment:

Initial price: $100,000

Price sold: $120,000

Profit made: $20,000

Mortgage payment: $0

Tax cash flow deductions: $6,000

After 4 years, $6,000 x 4 = $24,000

Add profits from the  final sale, $20,000

$20,000 + $24,000 = $44,000. 

Add up the cash investment, $100,000

ROI = (144,000 – 100,000) / 100,000 = 44. 

A comparison of the two methods shows that the cash method pays better than the other method.

Suppose you seek how to calculate ROI on investment property, there are other methods available including Net Operating Income, Cash-on-Cash Return, Internal Rate of Return, and Cap Rate.

Why You Need to Know the ROI of Your Potential Rental Investment

Property investment has its benefits. Its value increases at a higher rate than inflation, with normal cash flow from rent payments, tax benefits, as well as depreciation cuts that you can’t get from any other investments. 

There’s no set figure for ROI on rental properties. Different investors take risks based on the size of their financial portfolio, which is why knowing your ROI and what you stand to gain is essential. Some experts believe that a good ROI starts above 10 percent. This does not mean that ROI of between 5 to 10 percent is bad.

With ROI, you can have a good idea of what you’ll get out of your rental property, for the desired period you pick. It also helps determine the expenses that’ll be incurred during the sale of the property. A good advantage is that a property value appreciates over the years, it can’t depreciate. 

In addition, real estate experts also estimate that the average real estate return on investment is about 10 percent, after putting certain factors like economic inflation cost into consideration. 

ROI Complications

For a simple formula that can be used to calculate your expected profit, as well as the costs that may come up, certain issues may arise that can overhaul the entire investment. 

Some of these complications majorly arise in cases when an investor uses the financing option, such as a second mortgage taken on the property and the interest piles up. Other issues may be the high cost of maintenance, utility bills for the property, as well as taxes. 

Summary

As a real estate investor, knowing how to calculate ROI on investment property is essential for your ride to financial prosperity. As stated, real estate is still one of the surest and reliable ways to invest right, and knowing your ROI sets you on that part. ROI may be a bit complex to calculate, especially when starting out as a newbie, but will be relevant in the long run.