Depending on the real estate investment option you chose, real estate properties can be a profitable means of earning passive income. Accumulation over the long term, with a set amount of income flowing in almost every other month, is one sure means of increasing your net worth without lifting a finger in hard work. The key, however, is knowing which property can be set to bring you that financial freedom you dream about and hear others talk about.
ROI (Return on Investment) is the result of the calculation of the amount gotten as profit from investments made. This amount is expressed as a percentage and can help you predict your future earnings from your investment, all factors being considered.
Since it has been established that ROI is necessary for forecasting your profits, it’s important to know how to calculate the average ROI on the rental property. You can also get a rough estimate using a property calculator.
Calculating ROI
Before we break down ROI, let’s look at the general formula used to calculate ROI. calculating it will be determined by two things; whether you paid for the property with cash or financed it through a mortgage.
Rental Properties Paid With Cash
ROI = (Net operating income + appreciation)/ cost
Rental properties purchased with cash can easily be calculated. Just sum up the net operating income with the appreciation or use a rental property calculator.
Rental Properties Purchased With a Mortgage
ROI = (Net operating income – mortgage percentage + initial fee paid + appreciation) / cost
When calculating ROI on rental properties purchased through a mortgage, it’s important to include factors leading up to acquiring the mortgage. This includes the percentage mortgage to be made and the initial investment made before summing up with the net operating income and the appreciation.
You can see that Net operating income plays a vital role in both formulas. Understandably, the formulas both look complex and can be challenging especially for a beginner looking to go into rental property investment. If this is you, bypass the stress using the accurate ROI calculator rental property.
Factors Involved in Calculating ROI
There are factors that you need to consider to get an accurate ROI. They include:
- Details on Mortgage
Take into consideration the mortgage fees involved in getting a rental property. They include the terms of the loan, part payment made during the application process, interest rate, and the final closing fees.
- Expenses Spent Monthly
To get an accurate ROI, deduce the amount spent on bills and other utilities every month. Some of these bills include repairs and property management fees for a month too.
- Expenses Spent Annually
Expenses calculated on a per-year basis should be calculated too. This includes taxes paid on the property and the cost of insurance.
- Intricate Details of the Property
Every single detail that could affect the income of a property should be collated. The square feet the entire property is sitting on, the number of bedrooms, taxes that the authorities will charge, and the specific property value should be calculated.
Rental Properties Worth Purchasing
This section may not be of many benefits to people who are already into real estate rentals. As a beginner, there are some types of properties worth considering to ensure you make enough profit from your investment.
Consider residential properties like a set of apartment blocks, single-family houses, townhomes, and duplexes. As a beginner in real estate investment, it’d help if you consider starting with residential properties before venturing into other real estate investment options like commercial real estate properties, such as office spaces and retail stores.
Calculating ROI on Rental Properties
For Properties Purchased With Cash
Suppose a house was bought at a total of $62,000 (the price is $60,000 and the closing costs took $2,000). After deducting expenses, the remaining balance is $7000. After 5 years, the house is finally sold for $85,000.
So, ROI = (7000 + 23,000)/ 62,000 = 48.4 percent
For Properties Purchased With a Mortgage Plan
If the same house was bought at $60,000 but with a down payment of $6,000 attached with the closing fees, the final profit becomes $8,000. The mortgage payment is $3000. As principal paid, the amount paid is $500. After 5 years, the house is finally sold for $85,000.
So, ROI = $8,000 – 3,000 + $500 + 25,000 / 6,000 = 41.6 percent
Yeah, calculating the ROI of a property paid with a mortgage is complex. However, a great ROI calculator for rental property can take away the stress and headache. There are many free rental property calculators you can use to get a good estimate of what your profit will be.
ROI Not the Same as Final Profit
While the ROI calculated on a rental property may look good on paper, the final profit obtained may not be the same as what was projected. For some reason, a property can be sold well below the market value of the house. It’s common to see houses sold below their market value. This will affect the ROI projections for that property.
In addition, other hidden costs come up unexpectedly. Costs like repainting, landscaping, and general renovation of the house may affect it. Let’s not forget extra costs gone into setting ads for the property, and sometimes, the facility manager’s wage. Some ROI calculators for rental property may be programmed to have these extra costs when calculating, and others don’t.
Final Thoughts
Investing in rental properties is one best way to enter into real estate investment as a beginner. Assured income coming in passively every month, a chance to be called a homeowner and other factors can be all the motivation you need when starting your real estate investment journey.
However, you might worry about the cost, especially if the property was purchased with a mortgage, which affects the ROI. Hopefully, with the calculation methods disclosed above, you can be able to use the ROI calculators rental property to calculate your investment ROI and estimate your profit.
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