Welcome to the topic “HOW TO CALCULATE ROI ON PURCHASING AN INVESTMENT PROPERTY”
The basis of all the investments, either stocks, bonds, or real estate, is to make money and increase the wealth over time. Therefore, it is quite safe to say that you hope to profit from real estate investment. Those people who can accurately calculate their potential earnings from an investment property before purchasing it are likely to increase their success chances. ROI is one of the best indicators that the investors use to do so.
What is the Return on Investment (ROI) in real estate?
The return on investment or ROI is defined as the ratio among the profits and costs of an investment. It gives help to measure the amount of money made on the investment as a percentage of the value of an investment. The investors and the Colorado Licensed realtors use ROI to evaluate their investment’s profitability or compare the profitability of their different investments.
How to calculate return on investment?
The return on your investment property calculation is a very substantial sum to do. Nobody would be putting money in a long term deposit in the bank without getting an idea of what return the bank will be paying them; the same is the case with property investment. If you know how much you will get back and what your ROI will be, it will lower your risk and make you a smart investor.
The ROI formula is quite simple and easily understandable. Based on the ROI definition, the procedure for return on investment is as follows:
ROI = Gain from the Investment – Cost of Investment
Cost of Investment
This equation looks relatively easy to calculate, but several variables come into play. These include the repair and maintenance costs, leverage, and the amount of money borrowed with interest for the initial investment. All of these variables can affect the ROI numbers. There are two main methods to calculate ROI, the cost method and the out of the pocket method.
The cost method
In the cost method, the ROI is calculated by dividing the equity in a property by the property’s cost. The cost method divides the equity position by all the expenses related to the repairs, purchase, and rehabilitation of the property.
Out of pocket method
This method is preferred by the real estate investors in the Colorado Investment properties because of the higher ROI results. You can assume that the same property was bought for the same price. This time, the purchase was financed with a loan and a down payment.
Complications in calculating ROI
When you plan to purchase a property, the financing terms can significantly impact your investment’s overall cost. The complications in the calculation of ROI occur when the property is refinanced or a second mortgage is taken out. The interest on the second loan or the refinanced loan might increase, and loan fees might be charged, both of these can reduce the ROI.
There might also be an increase in maintenance costs, utility rates, and property taxes. If the owner of residential or commercial property happens to pay all the expenses, then all these numbers are required to be plugged for ROI updation.
What is a good ROI for real estate investors?
What one individual considers a good ROI might be unacceptable for the other one. In the case of real estate investment, a good ROI varies by risk tolerance because the more risk you would be taking, the higher ROI you can expect. Conversely, the risk-averse investors might settle quite happily for the lower ROIs to get more certainty.
Various factors influence the real estate return on investment. The most crucial factor is the location of investment property. You plan to buy your property by consulting your best realtor team will have a drastic impact on your future profits.
ROI calculation on Colorado real estate can be simple or complex, and it all depends on different variables. It is investing in real estate, whether residential or commercial, is proven to be profitable in a robust economy. Even in a recessionary economy, when the cash is scarce, and the prices fall, there are many real estate bargains available for the investors that can reap a handsome profit.
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