The time value of money formula is then used in the ROI formula to calculate the actual ROI earned on the investment property:
Assessing the potential Return on Investment (ROI) of an investment residential property is a very important process for real estates. The pros and cons of the investment may be calculated by comparing costs, including property and annual costs, versus potential future revenue. It is crucial to have some vital appreciation on how to reliably determine ROI on investment property with regard to its financials and the market scenario within which it will be situated.
In order to determine ROI in an investment property, the investors have to consider net income, from the property and the cost of acquiring and managing the property throughout its use. The amount of rental income, property taxes, mortgages, repair costs, property management fees are others which could influence the property revenues. Through these methods of analysis and forecasting of these financial ratios, the investors will be in a position to determine if the particular investment property is suitable for them in terms of its portfolio and their appetite for risk. ‘The following returns need to be considered when working out ROI for investment property: In the following section, we will explore in details some of the steps that an investor should follow in order to make the right decision of investing in investment property.
Investment property is one of the most common types of investments and in this article, we will explain how to calculate ROI or return on investment.
In the process of investment, there are several parameters which are used to compare the performance of one investment property with the other and the most important one among them is ROI, which stands for return on investment. Evaluating the return on investment with particular reference to investment property is very important with the view of ascertaining whether the investment property is yielding positive returns and thus whether or not it is a worthy investment. Here’s how you can calculate ROI on investment property:Here’s how you can calculate ROI on investment property:
First, assess the present gross rent collect which is the annual rental revenue that can be received from the property. This is the total amount of money from the tenants that you may be receiving on a per year basis in terms of rent. To arrive at this, all that is needed is the multiplication of the monthly rent by 12. For instance, if your property has an average of $1,500 in rent per month, then the yearly rent revenue would be $18,000 ($1,500 x 12).
Second, compute the sum total of expenditures for operation within the property. Some of the costs which are considered under this category include property tax, insurance, cost of maintenance and repairs, cost of hiring property management company and other incidental expenses that may be incurred in holding title to the property. Finally include all of these costs and get the total annual operating expenses.
That is the Gross Income Per Year minus Total Operating Expense to get the Net Operating Income or NOI of such property. To calculate, do not get confused by how you arrived at the total annual operating expenses; you just have to subtract it with the annual rent being earned. For instance, if the estimated gross income of the property by rental is $18,000 annually and the operating expenses are $6,000, then the net operating income (NOI) is $12,000 ($18,000-$6,000).
This simply involves dividing the net operating income by the total cost of the investment property in order to establish the ROI. The total cost comprises the cost of acquiring the property, the closing cost, any costs that may be incurred on the renovation or improvement of the property, among other costs that might be pertinent while acquiring the property. For instance, sometimes the total cost of investment property could be $200,000 then the return on investment would be $12,000 ($12,000/$200,000 X 100 to give 6%).
I think before I embark on a critical analysis of the suitability or otherwise of ROI as an evaluation criterion of the potential return on investment properties, it is important to note that ROI is just one of the tools available for the evaluation of investment properties. Other things which may need to be taken into consideration by one of include such aspects as cash flow, cap rate and the market as a whole.
In conclusion, it is, therefore, important to calculate ROI because ROI gives a clear and actual picture of such investment property’s performance and profitability. If there are differences in detailed aspects of real estate investing, these steps should be taken and everything concerned with expenses also everything concerning the income side must be considered too. This makes it important to point out that although, ROI can be very effective when measuring the feasibility of the possibility of success of an investment property this is not the only option that an investor needs to look at when assessing the feasibility of investment properties.
Therefore, the identification of the ROI is a reasonable continuation of the procedure with regards to the evaluation of the success and the profitability of investing in the property and real estate business. On the whole, when it comes to costing down all the possible expenses and probable revenue, which one has to spend on a specific property, then those particular decisions and predict becomes quite strategic. It also makes sense to take into consideration short-term factors as well long-term ones if, of course, one tries to gain a clearer view about further position of the investment being to be made. The intention here is to attest that once all model and terminologies a re understood and employed correctly there is an opportunity to get improve return on investment and possibly make profits in the field of real estate.
