Many investors look to real estate to build their portfolios. It is important that investors think with their heads and not their hearts. To do that, it is important to determine the return on investment (ROI). ROI measures the efficiency of an investment and indicates how lucrative it will be. It’s always expressed as a percentage or a ratio, so to calculate it, you divide the dollar amount of the return by the total dollar amount you paid out of pocket for the investment.

Auction.com (2019) provides as example:

I buy a home for $150,000 with cash, spend $12,000 on closing costs plus remodeling, and then rent it out for 12 months. My total out of pocket is thus $162,000. The tenants pay $1,500 per month in rent, or $18,000 for the one-year period. My ROI for that year is 11.1%.

$18,000 (annual return) ÷ $162,000 (total investment) = 0.111 or 11.1% ROI

So, is this number good or bad? Different experts will give you different answers. The easiest answer to this question would be “It depends” – on the size of the rental property, the location, the risk associated with the investment, etc. Generally, a good the average rate of return on investment is anything above 15% (Mashvisor, 2019). 

At Right Size Realty, we work with investors to find properties or provide property management services. Please contact us if we can help you with your real estate investment property.

References:

Auction.com (January 2, 2019). Retrieved from: https://www.auction.com/blog/how-to-calculate-roi-on-residential-rental-property/Mashvisor (2019). How to Calculate the Rate of Return on a Rental Property. Retrieved from: https://www.mashvisor.com/blog/rate-of-return-on-a-rental-property/