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No matter what type of investing you do, real estate, stocks,bonds, forex, etc. getting the biggest Return on Your Investments is always your primary concern. It’s imperative that you learn how to accurately figure out your ROI so you can narrow down your investment options to the most likely candidates as well as unload some unprofitable investments.
For the purpose of this article we are going to concentrate on figuring out the Return on Your Investments for a real estate investment. The same basic principles will be used for other investments too.
So, the first step is to determine how much a given investment will cost you. For example, if you are interested in buying a single family home so you can rent it out you will need to factor in not just the purchase price but also all the “incidentals” of ownership.
Here is where it can get tricky. If you aren’t careful you may accidentally forget to include certain things in your calculations. If you forget to include some expenses your whole ROI estimate will be off.
So, don’t forget to include all taxes, insurance, home owners association dues, maintenance work, property upkeep, etc. into your estimates (and don’t forget about closing costs, attorneys fees and realtor commissions!).
Once you know, or at least have made a realistic educated guess, how much your investment will cost you will next have to determine how much you can make off that investment.
Let’s say that your mortgage, insurance, taxes, etc. payments on your house will cost you $2,500 a month than that is the minimum you can get in rent and still break even. Mind you, that doesn’t include any profit for you so it isn’t much of a deal for you!
So, in that scenario you would want to make sure that other houses in that location can easily rent for over $2,500 a month. The more over that amount you can get in rent, and still be competitive in that market with other rentals, the more profit you will make and the bigger ROI you will realize.
Now, a word of caution; you will need to have all this figured out before you buy the property. If not, you may find that you can’t charge enough rent to make any money on the investment. That is not what you want.
And please don’t think you can just raise your rent, if you raise your rent so it is a lot higher than the other rents for similar properties in that location, no one is going to pay you more for something they can get for less money. Your rent must be competitive for that market.
This is an easy way for you to decide if buying a certain investment property makes sense. If you can realistically create a positive monthly cash flow on the property, it is likely a good investment for you (though you must also consider if houses in that location rent well and what the average occupancy rates are).
Figuring out the Return on Your Investments is very important so you can make a sound decision.