Real Estate Investing: The ROI Formula

If you're new to real estate investing, then working out the ROI for your investment property is important. Learn the best ROI formula.

How To Work Out The ROI For Your Investment Property

Looking to calculate the ROI for your investment property? Understanding the ROI formula is essential if you're getting into real estate investing.

Knowing your ROI helps you understand how profitable your investment property is and enables you to make informed decisions that support your real estate investment business.

What Is ROI?

ROI is short for return on investment and measures how profitable your investment property is compared to the total cost. ROI is shown as a percentage and shows how much your investment property will generate after expenses.

Understanding the ROI means investors can compare different property opportunities and decide where to invest their capital for maximum income potential. It can also forecast future performance.

Take this as an example: if a property generates £10,000 in annual profit but costs £200,000, the ROI would be 5%.

The ROI Formula For Your Investment Property

The ROI formula is ROI = (Final Value − Original Cost ) ÷ Original Cost.

Another example of this is if you invested $400,000 into a property, then sold it for $525,000, the return on investment is 31.25%.

What To Consider When Working Out The ROI

When working out the ROI, it’s important to account for all factors so you get an accurate picture.

Some factors to consider are:

• The purchase price and renovations - Repairs and remodeling impact the price of your property and should be added to the total cost to ensure you're getting a profit.

• Property management - Ongoing costs like property management, utilities, and taxes can increase expenses and should be factored in.

• Home equity - Equity is the difference between the property's market value and the mortgage owed. As you pay the mortgage, the equity grows, and you can factor it into your annual budget by adding it to your cash flow.

• Cash vs financed transactions - Buying a property outright in cash means the ROI formula is easier to calculate, and you can include any improvements to calculate your total investment. For mortgages, include the closing fees, down payment, and renovation costs. Deduct the monthly mortgage payments to find the net gain when calculating your annual return.

• Other costs - Consider any unexpected repair costs, vacancy periods, and local taxes.

What Is a Good Return On Investment?

There is not a single ROI that is good when it comes to real estate investing, as it depends on multiple factors such as the risk level, market conditions, and location.

Some figures to go by are:

• 3-5% ROI - Stable for prime areas.

• 6-8% ROI - Strong for residential property investments.

• 10% ROI - This is great but high risk and needs active management.

Common ROI Mistakes When Buying Property

As a beginner to real estate investing, mistakes can happen, here’s some common ROI mistakes to avoid.

• Forgetting any hidden costs, like maintenance costs.

• Ignoring potential vacancy periods.

• Not considering long term growth or resale value.

• Overestimating potential rental income.

Tips For Increasing The ROI For Your Investment Property

There are some small tips you can implement to help increase the ROI for your investment property, such as:

• Optimize your rental income - Research similar properties in the area you are renting and adjust your pricing based on demand and seasonality. You don’t want to overprice, nor underprice.

• Add value strategically - Adding value strategically to your property, like energy-efficient appliances and good lighting, can make all the difference to your property's value.

• Use a shared housing model - Use a shared housing platform like Alcove to increase occupancy rates and provide a steady income.

• Up the marketing - Take professional photos and advertise more, utilize flexible leasing when possible.

• Review the ROI regularly - Annually, it’s a good idea to review the ROI so you can spot any opportunities to improve your performance.

Get High Return On Your Investment Property With Alcove

It’s important to remember that the ROI formula is only one part of successful real estate investing. When buying property, you also need to consider market trends and sustainable growth.

At Alcove, we help landlords fill empty vacancies through our shared housing platform, maximizing your rental income by renting out each room in your property for full occupancy.

We help landlords earn between 5%-20% more each month than they would leasing traditionally, increasing their ROI.

Learn more about Alcove for homeowners here.