What is a good real estate investment payback period? If you’re a real estate investor, or if you’re considering becoming one, then one of the methods that you will be using to calculate the rate of return on your investment is the real estate investment payback period.
But what exactly is the real estate investment payback period, how is it calculated, and what’s considered a desirable payback period for investing in real estate?
Real Estate Investment Payback Period
A real estate investment payback period is the number of years it will take for an investment to pay back the amount of money that was put into it. This includes both the initial invested capital as well as the costs for running and maintaining the investment property.
In other words, the real estate investment payback period relies on the cash flow for its calculation, as the cash flow accounts for the income generated by the investment property, which in turn accounts for all the running costs and expenses.
Calculating the real estate investment payback period is simple:
Investment Payback Period = (Initial Invested Capital / Annual Cash Flow)
Of course, you will need to have a positive cash flow in order for your investment to pay off, otherwise, the investment payback period will be virtually infinite and the property will not pay for itself.
What’s a Good Real Estate Investment Payback Period?
Since the investment payback period is the metric that is used to determine the number of years before the investment can become actually profitable, it comes as no surprise that most real estate investors and business owners use it as a determining factor of whether or not an investment is worth their time and money.
But, what is considered a good payback period when investing in real estate?
The short answer is: the faster, the better.
The fewer years it takes for an investment to pay back the amount of money invested in it, the sooner you will start to gain profits from it, making it more desirable. However, there isn’t a specific number of years that is considered optimal for a real estate investment payback period.
Similar to other ROI metrics such as the cap rate and the cash on cash return, the investment payback period can vary from one market to another, and the desirable rate can vary from one investor to another.
To learn more about how we will help you make faster and smarter real estate investment decisions, click here.
The Downside of the Investment Payback Period
While calculating the real estate investment payback period can be a great method for determining the quality of any real estate investment, the metric is by no means perfect.
One of the biggest weaknesses of the investment payback period method is that it does not account for the lifetime value of money. Meaning, when you look at an investment payback period chart that goes up to 10 or more years in the future, you should be aware that the money generated by your investment then might not be worth the same amount as it is today.
This is especially important to consider if the property you’re investing in is not expected to pay back the amount invested in it until several years in the future, and the longer it takes it to do so the more likely it is for that period to extend even further.
This further reinforces the notion that shorter payback periods are better, as the risk of the lifetime value of money affecting you negatively will be much less likely over shorter periods of time.
The Real Estate Investment Payback Period Calculator
While calculating the real estate investment payback period for a single property might not be difficult, most real estate investors know that in order to make wise investment decisions, they will usually have to do the calculations for several properties before deciding on the most promising one.
This means that when investing in real estate you might have to do the calculations for tens of properties, and sometimes even hundreds. So, how can you avoid the hassle with the use of today’s technologies and emerging real estate investing websites?
Use a real estate investment payback period calculator.
This is a tool that will automatically calculate the investment payback period for every property that you’re considering investing in. The tool would usually include sections for calculating the initial investment, the cash flow, and all other aspects that might affect your investment, including all running and maintenance costs and expenses in order to give you the most accurate results.
Mashvisor’s investment payback period calculator, for example, can be found on every property page that you visit, allowing you to quickly and easily see what the payback period is for each property and compare large numbers of properties in short amounts of time.
The tool includes several customization elements, mainly in terms of the costs and expenses as well as the amount of money generated from the property, making it optimal for initial use as well as further calculations down the road and once you’ve done more research and obtained more accurate numbers.
To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.
The real estate investment payback period is one of the best metrics to use to determine the value of an investment property and plan the financial future of your real estate investment.
The metric is especially useful when investing in rental properties, but can be used with other types of buy-and-hold investments as well.
If you’re looking for the most reliable and easy-to-use tools for calculating the real estate investment payback period for every property that you’re considering, Mashvisor is just the tool for you. Combined with several other features and tools, Mashvisor provides you with everything you need to invest in real estate, from the starting step of finding properties, to analyzing them, to comparing them, to making the final calculations; Mashvisor has it all in one place.