Choosing the best investment property is only the beginning of your work in the real estate investing market. As time goes by, you’ll need to monitor and evaluate real estate investment performance to see how your real estate investment properties are working together in your real estate investing portfolio to help you grow toward your goals.
In this blog – the final one in the rate of return on investment blogs series – we’ll see how necessary it is to evaluate real estate investment performance over time, as it helps real estate investors determine whether or not they’re on track to achieve their financial goals. But, before you, as a real estate investor, can evaluate real estate investment performance, you first need to determine the return on investment you are trying to achieve – this is why real estate investors consider using the rate of return on investment as a method to monitor and evaluate their investments.
If investments are not showing any returns or the return on investment is slipping, real estate investors need to determine why this is the case and decide on the next move to recover. Additionally, because the real estate investment market changes all the time, you have to be attentive and find investment opportunities that will improve your real estate investing portfolio’s performance.
Related: The Ultimate Guide to Rate of Return on Investment Properties
Ways to Evaluate Real Estate Investment Performance
There are a number of different ways to measure performance that you need to consider in order to assess how well an investment is doing. The measure you choose depends on the types of real estate investments you own and the information you’re looking for.
For example, if you own a real estate property which you hope to sell in the short term for a profit, you should be more interested in whether its market price is going up, has started to slip, or seems to have remained the same. On the other hand, if you are a buy-and-hold real estate investor, you’ll be more concerned about the property’s value 15 or 20 years in the future; thus, you should be more concerned with whether it has a pattern of earnings growth and appears to be well-positioned for future growth.
In contrast, if you’re a conservative real estate investor (or you are approaching retirement), your main interest would be in the rental income that your real estate investing property provides. In this case, to evaluate real estate investment performance, you may want to examine the interest rate you are paying in relation to the current market rates and evaluate the rental income the real estate investing property provides.
When you evaluate real estate investment performance, you need to make sure that you are comparing apples to apples. Finding and applying the right evaluation method to your investments is important. If you don’t, you might end up drawing the wrong returns and conclusions. For example, you can’t compare the performance of a long-term single-family house to a short-term Airbnb rental since they don’t fulfill the same role in your portfolio. Instead, what you need to do is measure a single-family house’s performance by the standard of other single-family houses in the market.
Using the Rate of Return on Investment to Evaluate Real Estate Investment Performance
Your rate of return on investment (ROI) is, in simple words, the amount of gain you receive from the investing property over a period of time, calculated in the form of a percentage. This percentage could be positive, indicating that you’re making a profit from an investing property, or it could be negative – meaning you’re actually losing money from your investments, which is something no real estate investor wants.
The rate of return calculator is a real estate investing tool that enables real estate investors to measure the profit or loss of their investment. To calculate your rate of return on your investments, use this basic formula:
(Gain from Investment – Cost of Investment)/Cost of Investment x 100.
For example, suppose a real estate investor purchased an investment property with a total of $50,000, and the total profits he/she made from this investment property sum up to $70,000. In this scenario, the rate of return on investment equals: ($70,000 – $50,000)/$50,000 x 100 = 40%
Related: Using Mashvisor’s Investment Property Calculator to Estimate Rate of Return
Now, how does this help real estate investors evaluate real estate investment performance? Simply, real estate investors compare the rate of return on their investing property to the average rate of return in the real estate market. This gives them an idea of how well their investments are performing and whether they’re keeping up with current real estate market trends. If the rate of return on investment property meets or surpasses the average rate of return, then the real estate investor is on the safe side. However, if it’s below the average rate of return, the real estate investor should probably reconsider this investment.
Keep in mind that to evaluate real estate investment performance based on its rate of return, you don’t actually have to sell an investment property to calculate its rate of return. In fact, calculating the rate of return on your investments could be one of the factors that help you decide whether to keep an investing property in your real estate portfolio or sell it and use your profit as a down payment to invest in another one that would likely have a stronger performance.
Helpful Tips to Evaluate Real Estate Investment Performance
1. Review and understand your account statements. Your account statement provides you with an advanced picture of your account performance, including the total value of your account.
2. Remember to factor in transaction fees. To make sure that your rate of return calculation is accurate, it’s important to include the transaction fees you pay when you buy an investment property. Also, if you’re calculating the rate of return after selling an investment property, you should subtract the fees you paid when you sold.
Related: Calculating the Rate of Return on Investment Property: Step by Step
3. Factor in inflation. If you buy and hold a real estate investing property in the long term, inflation plays a big role when you evaluate real estate investment performance using rate of return. Inflation is when your money loses value over time. It’s the reason why a US dollar in 1950 could buy a lot more than a US dollar today. The rate of return calculation that takes inflation into account is called real return. To calculate the real return, real estate investors have to subtract the rate of inflation from the percentage rate of return. For example, if the rate of return on your investments equals 10% in a given year, but inflation sent prices rising 3% in that year, then your real return would be only 7%.
4. Consider the role of taxes on performance. To evaluate real estate investment performance, it is important to calculate tax returns as some interest incomes may, in fact, be tax-free. In this case, even though you may earn a lower interest rate, your rate of return on your investments could actually be higher than the return on investments which paying a higher interest rate.
5. Understand the reasons behind your performance. There are plenty of reasons why your real estate investment is performing the way it is – the market conditions, the mix of investments you own, how long you’ve held your investments, or even a combination of these factors. In any case, you need to stay aware of these reasons.
Calculating the rate of return is one of the many ways real estate investors should consider when they evaluate real estate investment performance. Not only does it show how an investment property is performing, but it also keeps you up to date with the ever changing real estate market, and recognizes any changes that need to be made regarding your investment in order to keep you (or put you back) on track.
One way to calculate the rate of return is through an investment property calculator. Start your trial with Mashvisor to get access to plenty of real estates investing tools, including Mashvisor’s investment property calculator, which is the best calculator in town that gives you the most precise results possible, thus giving you the ability to evaluate real estate investment performance accurately.
As stated in the beginning, this is the final blog in the rate of return on investment blogs series. So, if you’ve made it all the way here, congratulations! You have now acquired the necessary knowledge concerning the rate of return in real estate investing.