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 How To Calculate Real Estate Investment Returns
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12/20/2023

ROI Unraveled: How To Calculate Real Estate Investment Returns

The average real estate ROI last year in the USA was just over 10%, a healthy return for any investor. But that might prompt a question for you: how are your investments doing compared to this average?

If you don't know the answer, read on. In this guide, we'll explain what the term ROI means. And you'll learn how to calculate real estate investment returns.

You'll also discover how to use your ROI calculation to shape your investment strategy.

How to Calculate Real Estate Investment Returns

ROI, or Return on Investment, is one of the most valuable financial metrics for investors and entrepreneurs.

It tells a story that goes beyond mere profit numbers. ROI means an investment about the effectiveness of their investment.

ROI tells you the money you got back from what you invested. The higher the ROI, the better your investment.

The calculation is a relatively simple one. You take the current value of your real estate investment and subtract the total cost of that investment. You then divide this number by that original investment cost.

ROI is usually shown as a percentage. For example, a 200% ROI means you made twice as much money back as you spent on your investment.

Understanding your ROI metric is a crucial tool for your real estate journey.

It helps you make decisions about future investments, and it will help guide you on your investment strategy, like the money you put into a property for renovations, for example.

Tracking your ROI across each investment will show you a long-term picture of your success. Ideally, most investors would like to see a steady or even increasing ROI over time.

Steps to Calculating ROI: Your Property's Value

To calculate ROI, you'll need to assess the current market value of your property.

That is the figure you'll use for the first part of your calculation, and accuracy is vital if you want a true picture of your ROI. So you need the most current data available; avoid using a valuation from weeks or months back.

Most real estate investors will use professional teams like us to help with this valuation, as many factors are involved to get an accurate picture of a property's value.

Experience here is an asset. You need to consider the property's location and any local market trends in that area.

You'll also need to assess the property's condition, including any upgrades you made to the investment. But this appraisal must also factor in similar properties in the area.

It helps determine how your property would fare against a competing home if you put it up for sale.

A professional can also obtain current data on recent sale prices. When prices fluctuate considerably, the most recent data from the last one to six months is the best way to achieve an accurate appraisal.

Capital Gains and Advanced Calculations

The best way to get an accurate ROI is to include capital gains for the property - how much the property's value has increased since you purchased it.

It tells you what your ROI would be if you were to sell the property today. Thus, it's an excellent reflection of how your investment is performing, whatever the market conditions.

It's also one of the best ways to shape your investment strategy. This is where you'll need to use your current valuation of the property.

Considering capital gains will also help you determine the tax implications of your investment, which will impact your final ROI.

Calculating Your Income and Expenses from Your Real Estate Investment

To understand your return on your investment, you need a picture of that return - in other words, your income. To do that, you'll need to evaluate all income streams for your property, so be methodical.

So, in addition to basic income like rent, check whether you have other income streams to add to that number, like service charges.

When establishing your income, you must also calculate your operational expenses.

Again, you need to be meticulous to ensure you cover all expenses. Remember to add costs such as ongoing building maintenance and any building fees. You will also want to include mortgage interest and insurance costs.

When you have your income minus expenses, you'll get an accurate picture of your net income.

That will give you the number you need to figure out your ROI. It will help with your long-term planning, as this figure will increase in line with the length of time you receive monthly net income on that investment.

ROI and Your Investment Strategy

It's helpful to recalculate your ROI at regular intervals. Seeing how these changes will help direct your investment strategy and improve your monthly cash flow.

First, you can look at the investments you make in upgrading your properties and the impact that has on the money you make from that investment.

You may be overspending and not seeing a positive impact on the property's value.

Conversely, your property value may be hindered because of the property's condition, in which case you may want to invest in some maintenance and repair work.

ROI data will also help you target the best investments for your properties. For some tenants or buyers, a high-spec kitchen renovation might have the most significant impact on the property's value.

In other places, you could be better off making more economic updates like the modernizing decor.

You'll also want to use your ROI to assess the operational expenses for your property. For example, suppose you use a property management company to oversee the day-to-day.

You might want to see what return you get from these services. An experienced company will do an excellent job with maintenance, for example, which will lower your long-term repair costs.

If it's repairs to heating and air conditioning, it could also help you reduce your monthly energy bills.

ROI: a Powerful Tool for Investors

Don't overlook the power of ROI to help direct your investment strategy and help you achieve a high-yield return. Now that you know how to calculate real estate investment returns, it's time to get a picture of your property's performance.

Why not begin that next step by contacting our experts at Sotheby's International Realty? We can help you to determine your property value in Olympia and support your long-term real estate investment journey.

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