; How to Calculate ROI for Real Estate Investments
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# How to Calculate ROI for Real Estate Investments

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```									HOW TO CALCULATE ROI
for Real Estate Investments
How to Calculate ROI for Real Estate Investments

ROI or Return on Investmentis a term to describe how much you profit from an
investment. It is the percentage of money made on an investment after all the costs
associated with that investment are subtracted. So, if you invested \$10 and earned \$1,
your ROI would be 10%, assuming you get your original \$10 back.

The basic equation is:

(Gain – Investment Cost) × 100%
___________________

Let's look at the two basic methods of applying this equation to real estate
investments:

1. The Out of Pocket Method

Suppose you purchased a house for \$100,000. The needed rehab was \$60,000
and the eventual selling price was \$200,000. Let's also assume that the investor
only had to come up with a \$10,000 down payment and the rehab costs.

The ROI would be:

(\$200,000 – \$160,000)× 100%
_______________________= ~57%
\$70,000

2. The Cost Method

Let's use the same imaginary situation, but the investor paid for everything with

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his own money.

The equity in the property is \$40,000 (200,000 – 100,000 – 60,000= \$40,000).

The ROI would be \$40,000 / \$160,000 = 25% (A 40k profit on 160k spent).

The first method allows for the use of leverage, so it might seem better to borrow as
much as you can. But consider that that actual amount of money you would make
would be greater in # 2, since there wouldn't be any costs associated with the loan.
So your rate of return might be lower, but the number of dollars in your pocket would
be greater.

Which method you choose is up to you. The point is to stick to one method when
comparing different prospective investments. ROI can be an excellent tool to
determine which deal is better than another.

Other Considerations

Don't be concerned with equity in your calculations; it’s better to be concerned with
the amount of money you are left with at the end. You need to consider all your
expenses, such as:

Property taxes that you have to pay

Insurance while you're holding the property

Utilities

Interest on any loans

Closing costs, both to buy and to sell the property

Real estate commissions when you sell

Mowing the grass until the property sells

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Appraisal and inspection costs

Costs for repairs – both materials and labor

The real estate shows you see on TV rarely address all these costs. All they talk about
is the purchase price, cost of repairs, and the selling price. As you can see, repair costs
are only one of many costs that you may be responsible for. Those shows have
nothing to do with reality. Be sure you’re subtracting all your expected costs when you

Also consider time. Is a 40% return in 12 months better than a 20% return in 12
weeks? In most cases, no, it is not. Just be sure to consider the time period when
you're making comparisons.

Also consider cash flow.In the case of an apartment building, your 'gain' would be the
rents that you collect over the course of a year. But be sure to include a vacancy rate
in your calculations. There are also greater costs associated with owning rental
properties: repairs in the middle of the night, painting between tenants, advertising,
carpeting, landscaping, and more.

Getting an accurate ROI estimate really isn't possible in real estate. You never truly
know your future selling price or how long it will take. Repair estimates can be off as
well. That's why it's important to estimate high on your costs and low on the income. Be
conservative and you’ll always be pleasantly surprised in the end!

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Curtis Rose is an experienced professional with extensive experience in all
aspects of personal finance. Curtis writes and publishes articles, courses,
guides and special reports on his personal finance blog. Sign up for his

http://www.PersonalFinanceDashboard.com

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