When it comes to Real Estate Investing, there are few things
more important than numbers. As with all
investments, Real Estate Investors must be sharp and disciplined as they can
be…but which numbers matter?
Of all numbers that may mean something, the term, ROI(Return
On Investment) might possibly be the most important one. This is the term, as with all other
investments, that defines whether the investment you made was a
wise one or not.
How is ROI Calculated?
I will provide a simplified example. There is a Gross ROI, and also a Net
ROI. The way to calculate it is actually
quite simple. Gross ROI is the amount of
income your investment brings in over the year, divided by the total amount you
paid for your investment. For example:
Let’s say you purchased a rental home for $100,000. After Closing and small remodeling, you’re
all in at $109,000. After its all said
and done, you are able to rent the property for $1,000 per month. You take that annual rental income of
$12,000(monthly of $1,000x12) and divide it by the $109,000. $12,000/$109,000=11.01%. You’re generating an 11% GROSS ROI on your
investment.
While that seems like a great return on your investment(technically…those
are indeed pretty great numbers) there are also other financial factors that
must be considered. What about insurance,
taxes, HOA fees, etc? How do those numbers add in to your ROI?
Just like with a paycheck or annual salary, there’s a gross
salary, and a net(after taxes/deductions). How is this factored into your potential
investment?
Again, let’s go back to our original example: that $109,000
investment with a gross $1,000 rent. For
the sake of this example, let’s say the insurance is $1,200/year($100 per month),
and the taxes and HOA add up to $250 per month ($3,000 per year.) Take the $12,000 in annual rental income,
then subtract the $4,200 in yearly operating expenses, and you end up with a net
of $7,800 in annual profit. Add that
into your calculations, and you end up with a 7.15% ROI.
Annual Rental Income – (Monthly Operating Expenses x 12) = ROI
Initial Investment
$12,000 - $4,200 = 7.15%
$109,000
These numbers are obviously simplified, and other financial
considerations and factors may go into these calculations.
What numbers are good?
It depends. Obviously, higher
numbers mean higher return, but everything is very dependent on each individual
investor’s situation.
Let’s discuss this in further detail! Call me at 407.517.8693, or email me, at isellcflhomes@gmail.com, and let’s
customize your investment options to make your portfolio a success!