Buying an investment property could be the best move you make- if you buy the right one. But how does one choose the right investment property? Short answer: With the help of an ROI calculator.
ROI, as many already know, stands for return on investment. An ROI calculator is a real estate investing tool that calculates the potential returns you can expect from a real estate investment. However, it does much more than just crunch up a bunch of numbers.
Return on Investment
Before we get into the workings of the ROI calculator, let’s first get a better idea of what ROI actually is. When investing in real estate, your return on investment (ROI) is based on your property’s cash flow. Cash flow is the investment property’s income minus expenses, as well as the equity that builds up. Because ROI is a profitability ratio, it’s also largely used to evaluate how well an investment is performing and to compare the performance of different investments of all types and sizes.
When you start investing in real estate properties, the goal is to earn a profit. Through cash flow and appreciation, real estate investors can build their wealth. Obviously, when we say cash flow, the ideal case is to have positive cash flow. This way you’re getting paid, and at the same time growing equity. For those of you who haven’t invested yet and are still wondering how to make money in real estate when so many factors are involved, the answer is simple. By using one of the greatest real estate investment tools out there, the ROI calculator, any real estate investor can be on their way to making the best profitable real estate investments.
Related: 6 Must-Have Real Estate Investment Tools
ROI Calculator
An ROI calculator is basically an investment property calculator. There are many calculations involved with finding a profitable real estate investment. The reality is numbers and ratios are key players in the real estate investing game. It can be difficult and overwhelming trying to calculate and understand the math behind it all. With the help of an ROI calculator, you can conduct an investment property analysis in minutes and have the confidence you need to make the next best deal. It can also help in evaluating and comparing the efficiency of your operating rental properties. Let’s get into the 3 main reasons every real estate investor needs an ROI calculator.
Related: Where Can You Find a Rental Property Calculator?
#1. It Calculates More Than Just the ROI
If you’ve ever conducted a return on investment analysis, you know that ROI isn’t the only metric you’re looking for. In fact, there are many other ratios associated with finding a profitable investment property. The basic return on investment formula is: ROI = (Gain from Investment – Cost of Investment) / Cost of Investment
This formula only represents the simplest form of finding return on investment. However, there are other methods and calculations that can be made to represent a more accurate return on investment. An ROI calculator finds these other ratios and metrics to provide you with all the numbers you need.
Here’s what else an ROI calculator can help you find when analyzing an investment property:
- Cap Rate = Net Operating Income/Current Market Value
The cap rate (capitalization rate) is another profitability ratio used in a return on investment analysis. As you can see, it measures profitability by relating the investment property’s purchase price to the net rental income which the property is expected to generate. This is a very important and useful metric to know when analyzing investment properties because it also signifies the level of risk associated with a particular investment.
- Cash on Cash Return = Annual Net Operating Income/Total Cash Investment
This metric is usually only used when finding the return on investment for a real estate investment. Here, the financing method is important because many real estate investments are usually financed through a loan. It calculates the cash earned on the cash invested in a real estate property. This return on investment metric is pretty popular among real estate investors and is used in both residential and commercial real estate investing.
Related: Cap Rate vs. Cash on Cash Return
#2. An ROI Calculator Produces Results Quicker
When you’re on the search for your next great real estate investment, you’re usually not alone. If there’s a profitable investment property on the market, you’re going to face competition. However, competing for this property is difficult if you haven’t even realized the fact that it is indeed a profitable investment. See, in real estate investing you need to always be ahead of the game.
In order to get the best deals, you have to be one step ahead of the competition. When real estate properties go up for sale, they don’t go up with a clear rating of good or bad. They just go up. It lies on the interested investor to analyze the property’s performance and attractiveness. Sometimes, if you don’t analyze it fast enough, you miss out on a great opportunity. Other times you waste time manually calculating all the relative ROI metrics only to find out that it actually wasn’t as profitable as it seemed.
An ROI calculator solves that problem. With an ROI calculator, you don’t need to spend weeks researching a potential investment or waste time on spreadsheets. You just input the relative costs and it does all the work for you. This way you can focus on getting the best deals to grow your real estate investment portfolio.
Related: What Is a Good Return on Investment in Real Estate?
#3. An ROI Calculator is More Accurate and Reliable
The problem with manually making these calculations is that even after all the extra time spent, the final numbers might not even be accurate. There’s a higher chance of error when you calculate return on investment manually. Even when using a spreadsheet, you’re still required to input a lot of different numbers. One wrong number can deviate the entire final analysis. With an ROI calculator, you enter the basic costs associated with the investment property and it finds all the other numbers required to calculate return on investment. An ROI calculator also makes it much easier for you to modify the numbers, so if there’s ever a change in the costs you can quickly find the new return on investment.
So there you have it, the 3 reasons every real estate investor needs an ROI calculator. What are you waiting for? Invest in an ROI calculator now and never go back to wasting valuable time and using inaccurate numbers.
Note: Wondering where you can find the best ROI calculator? Head over to Mashvisor to use Mashvisor’s investment property calculator and start making better real estate investing decisions today.
To learn more about how we will help you make faster and smarter real estate investment decisions, click here.
