Guide to Calculating ROI on a Rental Property or Fix and Flip Investment Property
If you have real estate investment plans for the coming year, here's a helpful guide to calculating your return on investment (ROI).
Written by Roan James
People invest for one reason only, and that is to generate profit. This is especially true for real estate investing, which is still one of the safest business ventures out there despite the upfront costs. Yahoo Finance points out that 2021's real estate market gains will continue across the U.S. in 2022.
This is great news for anyone who owns real estate or is planning on having property rented or flipped. If you have real estate investment plans for the coming year, here's a helpful guide to calculating your return on investment (ROI).
1. Why ROI is important for real estate investing
ROI is a measurement of how much money is made on an investment in comparison with the initial upfront cost. Investors use the ROI to determine whether or not an investment is worth their time and effort. Investors can calculate how much money is expected to be made, and the profit they can expect to collect from the transaction.
When you make a big investment, especially in real estate, you should be properly prepared. According to Zippia, 8.5% of prospective real estate investors take further studies in finance or related fields in order to build a skillset best suited for real estate investing. Many opt for online programs, which are more flexible and convenient. Graduate programs in accounting teach advanced skills in accounting that can help real estate investors balance their books, calculate equities, and compare investments. Anyone armed with these financial skills will easily understand the basics of investing, and be able to maximize the profits of any investment.
2. Types of ROI
In real estate, there are many different types of ROIs. Just so that you get familiar with ROIs, here are the most common types:
• Expected ROI
• Required ROI
• Actual ROI
• ROI Under Variable Circumstances
• Average ROI
3. Factors to consider before calculating ROI
The more details you have about your investment, the more exact your calculation will be, and the more accurate your profit predictions. You will need to know the basic factors, such as the value of the rental property, closing costs, repair or remodeling costs. You must also consider monthly costs, like electricity, water, HOA, property tax, insurance, and other maintenance costs.
4. How to calculate the Actual ROI for a rental property with cash
The simple formula for ROI of any investment is:
ROI = (Gain on Investment − Cost of Investment) / Cost of Investment
If you buy a property with cash and decide to rent it out, calculating the ROI can get a little more complex. Here is a detailed example you can follow, using the basic factors we have already mentioned.
• You purchased a rental property in cash for $200,000.
• Your closing costs came out to $2,000, and repairing and remodeling costs came out to $18,000, resulting in your total upfront investment cost of $220,000 for the rental property.
• You decided to rent it out for $2,000 per month.
After one year:
• You collected a total rental income of $24,000 from the tenants for 12 months.
• Your monthly expenses including the electricity, water, property taxes, HOA, and insurance, came out to $4,800 for the year, which dived by 12 months equals $400 per month.
• Your total annual return is total income – total expenses = $24,000 – $4,800 = $19,200
To calculate the rental property’s ROI:
• Divide the total annual return ($19,200) by the amount of the total investment ($220,000).
• ROI = $19,200÷ $220,000 = 0.0872 X 100% = 8.72%.
• Your ROI = 8.72%
Congratulations! You now know how to calculate ROI for a rental property with repair and remodeling costs. With this computation, you can easily predict how fast you can get your investment back, and how soon you can start collecting profit. If you’re ready to learn more about investing in real estate, check out our informative website today at Money Source of America