The investment property calculator is a real estate investing tool that can help investors in deciding whether or not a real estate property is a good investment opportunity. This tool had simplified the process of investment property analysis; you don’t have to collect the data, enter it manually using spreadsheets, and then analyze it – the investment property calculator does all the work for you. It saves you time and effort and provides you with relatively precise results much quicklier.
What Is Return on Investment?
Return on investment is a profitability ratio used by real estate investors to evaluate how well an investment is performing and compare the performance of different investments of all types and sizes. It is a common and widespread metric due to its simplicity and broad usage; it can be applied to anything from real estate, through stocks and employees, to even a sheep farm – anything that has a cost with the potential to derive financial gains from can have a return on investment assigned to it.
Return on Investment calculator
A return on investment calculator is an investment property calculator which enables you to estimate the profit or loss from your investment. In addition, a return on investment calculator can also be used to compare the efficiency of a number of investments.
Moreover, ROI can have different variables, depending on various factors, mainly on the purchase of the property. For this reason, there is more than one way of computing this real estate metric. Here are five methods to calculate ROI to help you when you’re going to make a financial decision.
1. Return on Investment (ROI)
ROI is used as the standard when calculating return on investment. In fact, the other return on investment calculator methods are extensions of the ROI calculation. The formula to compute ROI is:
ROI = (Annual Rental Income – Costs and Expenses)/Cost of Property
- First, you calculate the annual rental income by simply multiplying your monthly rental income by 12 or your weekly rental income by 52.
- Then, the annual rental income is deducted from the sum of costs and expenses associated with the property. These costs could be paid at one time only (like closing costs) or are paid as long as you have an income property (like property taxes).
- Lastly, the difference between the annual income and the sum of expenses is divided by the cost of the property (or the fair market value).
ROI is a useful and simple return on investment calculation method; however, it fails to take into account whether the property is fully paid in cash or through a mortgage.
Related: Buying an Investment Property: Cash or Mortgage?
2. Cash Purchases
If you purchase an investment property fully in cash, calculating the return on investment is not too difficult; just use the ROI formula as in the previous point.
For example, a rental property costs $230,000. Its monthly rental income is $850, making the annual rental income $10,200. These two bits of information are simple to compute. However, the sum of expenses and costs requires more effort to obtain.
Expenses and costs may cover property taxes, renovation fees, closing costs, vacancy costs, and the list goes on. The majority of these expenses are tax deductible, which reduces the overall financial burden on a real estate investor. Once you have an accurate sum of expenses, you can calculate ROI. For this example, let’s say the final cost of expenses is $1,000. The property’s ROI would look like:
ROI = ($10,200 – $1,000 /$230,000 = 0.04 = 4%
You can find out all the expenses of an income property in no time by using Mashvisor’s return on investment calculator. Mashvisor’s interactive investment property calculator, a form of return on investment calculator, provides an accurate summation of your expenses, with the help of predictive analytics.
3. Out of Pocket Method
Most real estate investors finance their investment property through a mortgage. They calculate ROI then by using the “out of pocket method”. This return on investment calculator method is very popular since most real estate investors purchase investment properties through mortgages. It also results in higher return on investments, since the property is not fully paid in cash.
The ROI formula for the out of pocket method is:
ROI = Annual Cash Flow/Total Cash Invested
Annual cash flow is basically the same as (annual rental income – sum of expenses and costs) in the previous formula. The annual cash flow is obtained when the monthly mortgage payment and the sum of expenses are deducted from the annual rental income.
Another difference from this return on investment calculation method is the total cash invested – the value of how much you currently own of the investment property. This value is what results in a higher ROI than with the standard method.
4. Capitalization Rate
We use the capitalization rate (cap rate for short) when we want to calculate return on investment regardless of how an investment property was financed.
Cap Rate = NOI/Property Price
- NOI (net operating income) is derived by subtracting the property expenses from the annual rental income.
- The property price can refer to the full cost of the property (if paid in full with cash) or the amount invested in cash (when using mortgage).
For example, let’s suppose that an investment property costs $17,000,000, and its NOI is $1,000,000. The cap rate for this investment property would be: $1,000,000/ $17,000,000 = 5.8%.
A good cap rate is usually around 10%, and a great one is 12% or more. Cap rate is undoubtedly a great metric to extract from a return on investment calculator.
Related: What is a good cap rate for investment properties?
5. Cost Method
The final return on investment calculation method on this list takes into consideration an aspect of real estate investing that the other methods have not mentioned – equity. In real estate, equity is the difference between the market value of your investment property and the amount left of the mortgage.
Not many real estate investors look at this method when using a return on investment calculator. That’s because they tend to see cash flow as their main goal, not equity. The ROI formula for this method is:
Cost Method = Equity/Total Cash Invested
Why Use Mashvisor’s Investment Property Calculator
- When using Mashvisor’s investment property calculator, a type of return on investment calculator, you’re able to set the numbers of any variable you desire.
- Our return on investment calculator breaks down a single investment property in addition to analyzing the property’s neighborhood.
- Our return on investment calculator works for traditional properties and analyzes Airbnb rentals as well.
- Through a percentage called the Mashmeter, our return on investment calculator informs you if the investment property has good potential or not.
What more can you ask for from an investment property calculator?!
Related: Mashvisor’s Investment Property Calculator: Real Estate Investing Made Easier
Return on investment calculator informs you how your investment properties are performing. Its usage is much easier and faster than the manual spreadsheet. It’s enough only to type in the invested amount and the returned amount to get your estimated ROI.
As you start saving up for an investment property, you should prepare for buying a return on investment calculator. For more on buying an investment property calculator and becoming a successful real estate investor, start your trial with Mashvisor!