Buying property is exciting. But how do you know if it will make you money? That’s where return on investment, or ROI, comes in. ROI tells you how well your money is working for you. Want to turn your money into more money with real estate? Let’s break it down in a fun and simple way!
What Is ROI?
ROI means Return on Investment. It helps you measure how much profit you’re making compared to how much you spent.
Here’s a simple formula:
ROI = (Annual Profit / Total Investment) x 100
So if you earn $10,000 each year from a rental that cost you $100,000, that’s:
(10,000 / 100,000) x 100 = 10% ROI
1. Know the Costs Upfront
You don’t just pay the price tag of the home. There are more costs to count:
- Purchase price
- Closing costs
- Repairs and upgrades
- Property taxes
- Insurance
Add all of this up. This is your total investment.
2. Figure Out the Income
Now you need to know how much the property will earn you. This usually comes from rent.
You can check rental sites to see what similar homes are charging in the area.
Multiply monthly rent by 12 to get annual income.
3. Subtract All the Costs
Your property doesn’t just make money— it costs some too.
Each year, subtract the following from your rental income:
- Mortgage payments
- Taxes
- Insurance
- Maintenance and repairs
- Property management fees (if any)
- Vacancy loss (for months the property isn’t rented)
The amount you have left after subtracting these is your annual profit.
4. Do the ROI Math
Now that you have the total investment and annual profit, plug those into the ROI formula:
ROI = (Annual Profit / Total Investment) x 100
Your final number is the percentage that tells you how well the property will pay off.
Tip: A typical good ROI for real estate is around 8-12%. But this can vary depending on the area and your goals.
5. Compare with Other Investments
You want your money to grow. So think about whether putting money into this property will earn more than—say—stocks or a savings account.
If the ROI is lower than other investment options, maybe pass. If it’s higher, it’s worth serious thought.
6. Feeling Fancy? Use Cap Rate
If you want to go a level deeper, try using Cap Rate. It means Capitalization Rate.
The formula is:
Cap Rate = (Net Operating Income / Property Value) x 100
This ignores financing and focuses only on how the property performs on its own.
7. Use Online Tools
You don’t have to do all the math by hand. There are websites and apps that help:
- Rental property ROI calculators
- Cap rate calculators
- Cash flow analysis tools
Plug in your data and let the robot do the hard math.
8. Don’t Forget the Market
ROI isn’t just numbers on paper. Think about the future.
- Is the neighborhood growing?
- Are property values rising?
- What new developments are nearby?
A good location today can be great tomorrow!
Simple Final Example
You buy a rental for $150,000. You spend $25,000 fixing it. Your yearly income from rent is $18,000. Expenses eat up $8,000 yearly.
- Total Investment = $150,000 + $25,000 = $175,000
- Annual Profit = $18,000 – $8,000 = $10,000
- ROI = ($10,000 / $175,000) x 100 = 5.7%
Now you know what that property really gives you back!
Bring It All Together
Evaluating ROI isn’t rocket science. It’s just knowing your numbers, doing a little math, and thinking long-term. With these tips, you’re ready to invest smart!
So go ahead. Be a real estate boss. Crunch those numbers. And may your ROI be ever in your favor!
