Real Estate: information on investing in real estate, property management, Real Estate Listings, Houses for Sale, Rental Property

Step 4 - Do the Numbers Work?

Investing in real estate is all about the numbers! Whether it be stocks, bonds, businesses or real estate, Return On Investment (ROI) is the most popular and most standardized method of making investment decisions. This calculation compares how much money you can expect to make off the investment to how much money you actually invest.

Rental Properties(refer to ‘Rental ROI’ worksheet in Property-Purchase-Analyzer) As a rule of thumb, if a rental property doesn’t have a ROI greater than 10% per year it isn’t worth the investment…there are better deals to be found. Here is the formula to calculate ROI on rental properties:

Three steps to calculate ROI for a rental property:

Net profit:
= yearly revenue – yearly expense
= (anticipate revenue per month X # of months rented per year) – (monthly expenses X 12)
Initial Investment:
= down payment + cost of renovations & improvements needed
ROI:
= Net Profit / Initial Investment

Quick-flip Properties (refer to ‘Re-sell ROI’ worksheet in ) When using the quick-flip strategy, the ROI formula used is much different from the one applied to rental properties. In this case, the potential profit after re-sale is most important. Other items that differ are the inclusion of the property appreciation rate, additional improvement expenses and the value they add to the property, selling expenses, capital gains tax rate, and the number of months expenses are paid without offsetting revenue.

4 Steps to Calculate the ROI on a quick-flip property:

Increase in property value:
= [(property price X yearly appreciation rate) X (# of years before re-sell)]
+
[(improvement expenses) X (1 + the ROI % improvements will add to property value)]
Re-sell expenses:
= [(property price + increase in property value) X (realtors commission rate)]
+
[(# of months monthly expenses are not subsidized by revenue X monthly expenses)]
Net re-sell profit before taxes:
= Increase in property value – Re-sell expenses
OR
Net re-sell profits after taxes:
= (net re-sell profit before taxes) - (net re-sell value before taxes X capital gains rate)*
* this calculation is simplified. Depreciation and other tax strategies can reduce capital gains taxes
ROI after sale:
= net profit after sale /
[(down pmt + improvements made) + (# of months monthly expenses aren’t subsidized by revenue X monthly expenses) + (anticipated property re-sell price X realtors commission rate)]