Real estate return on investment (ROI) is the term used to see how much money you have made after the deduction of your costs in an investment property. This is a great way to see how effective your investments have been and lets you know how you should be investing in the future. In other words, it’s a great way of knowing if you made a good real estate investment or not.
Being able to calculate your ROI for your real estate investment property can be difficult because there are so many factors to take into account, and especially because it is really dependent on the investor what expenses to take into account and what to leave out from the final calculation.
The traditional formula for ROI is as follows:
ROI = Annual Return / Cost of Investment
What is considered a good ROI for a rental property?
This is a hard question to answer because there are so many factors that need to be taken into account. Location, property type, the properties condition… the list goes on. Some of the factors to take into account when you’re trying to calculate your real estate return on investment are debt (mortgage), taxes, rehabilitation for the property, insurance, equity and of course rental income.
Let’s go through an example…
Let’s assume you have just bought a home in St. Catharines for $500,000, paid $15k in fix ups and other fees and are currently charging your tenants $2,400 in rent.
ROI= (12x2,400) / (500,000 + 15,000) x 100
ROI = 28,800 / 515,000 x 100
I bet you’re wondering what this means. Well when an investor is looking at their ROI, they generally tend to think anything at or above 15% is considered a good return on investment. If the investor is using a mortgage, their return on investment for their rental property will definitely be a larger percentage, because there will be less costs associated.
Property values are constantly changing. Investors in the GTHA have seen great growth and one of the main factors encouraging them to invest in real estate is generating equity. The more equity that is generated means that these investors can use that ROI to invest in more properties and grow their portfolio. A great way to calculate this is by using this formula.
ROI = Equity / Cost
For example, let’s say an investor bought a house for $500k and made $30k of renovations. The property is now worth $575k this means that you built $45k in equity. When plugged into the equation, we get 8.5%.
There you have it, how to look at real estate return on investment. For more information on this and other real estate related material, be sure to check out our free reports on www.RockStarInnerCircle.com/reports.
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