So, what is a good return on investment property in real estate? How can you decide if a rental property will reap you positive cash flow returns and high profit margins in the long run?
Real estate investors are always on the hunt to maximize their returns and increase their wealth in the long term. Investing in the US real estate market right now is a sound decision, given the property location and economic trends in the area/state of choice. The US housing market is fairly optimistic in the first quarter of 2018, and it is up to savvy investors to capitalize on lucrative real estate opportunities before everyone else.
The best way to capitalize on a profitable real estate investment is to do the math beforehand and crunch those numbers. It is never wise to invest in real estate based on instinct or based on what feels right to you. Real estate experts invest based on real facts, statistics, and numbers, and not so much on what their gut instincts tell them.
Calculating the return on investment property is crucial to safeguard a profitable real estate business and earn a good return on investment. If investors disregard the empirical evidence, they can never arrive at the best real estate investments to grow their returns and multiply their wealth down the line.
Now the real questions to tackle:
- What is a good benchmark for a good return on investment property?
- How to calculate the return on investment property (ROI)?
What Is a Good Return on Investment Property in the US Real Estate Market?
Real estate investors should aim for at least 10% return on investment property (ROI) in the US real estate market. For beginner real estate investors, 8-10% will also suffice. The best advice is to seek professional advice from a real estate advisor or a real estate agent to back you up and show you the ropes.
7 tips to ensure a good ROI in real estate investing
- Target prime locations in good neighborhoods with nearby amenities, i.e., schools, park, and transportation facilities.
- Buy homes selling for less than $150,000 that are less than 20 years old.
- Hire a professional home inspector to assess the renovation costs.
- Keep up with real estate comparables (comps) on websites like Mashvisor.
- Your rental income must cover loan payments, taxes, insurance, fees, and (minimum of) 15% cushion for repair and vacancies.
- Your operating income should be (at least) 1.25 times your principal and interest.
- The worst return on investment is a bad tenant. Choose tenants wisely and do not neglect to run credit and criminal background checks.
The Best Return on Investment Property Formulas in Real Estate
1. Return on Investment Property (ROI)
One of the simplest and basic ROI formula to keep in mind as a real estate investor is taking into account your investment property gross rental income and gross expenses.
To calculate this ROI formula:
ROI = (Annual Rental Income – Costs and Expenses)/Cost of Property
- Calculate the annual rental income.
- Aggregate the costs and expenses associated with the rental property. These include your closing costs (paid only once) and carrying costs (costs associated with running the rental property).
- The cost of the property is the fair market value.
This ROI formula does not take into account real estate financing: whether the property is fully paid in cash or financed via a mortgage loan.
2. Capitalization Rate (Cap Rate)
Another return on investment property formula in real estate investing is the cap rate, which takes into account the net operating income (NOI) and disregards how the investment property is financed.
The Cap Rate Formula:
Cap Rate (%) = (Net Operating Income/Current Market Value) x 100
Net Operating Income (NOI) = Annual Rental Income – Operating Expenses
Current Market Value (MV) = Price of Property
For real estate comps, Mashvisor shows the cap rates for numerous rental properties (traditional and Airbnb) across the country in an instant. But one thing to keep in mind: cap rates are relative and should be compared with other cap rates in order to find the best real estate investment for growing your returns. While a cap rate of 10% can be considered a good benchmark for a certain location, it might be pretty low for another location.
3. Cash on Cash Return (CoC Return)
This formula measures cash return and is crucial for real estate investors capitalizing on positive cash flow properties. It simply measures the cash inflow and outflow of a rental property.
Cash on Cash Return on investment = Net Operating Income/Total Cash Investment
Capitalizing on a prime location and a good neighborhood is a surefire way to earn positive cash flow returns and achieve high rental income in the long term.
4. Mashvisor’s Investment Property Calculator: The Most Important Return on Investment Property Tool
If you value efficiency and time management, then Mashvisor investment property calculator is the best tool for you. The rental property calculator estimates the ROI and measures profitability for any rental property (traditional and Airbnb) in an instant. Don’t believe us? Request a free demo here.
The rental property calculator gives real estate investors accurate and real time results fast. Real estate investors and real estate agents love this tool because it cuts their time in half and guarantees the best results to find those lucrative real estate opportunities across the country.
To conclude this post, our last advice to real estate investors is to never invest on a whim without calculating the return on investment property. Always take into account professional advice, facts, and real numbers before you go ahead and close a deal on a rental property. To make money in real estate investing requires much due diligence as well as real estate market analysis and investment property analysis. The best real estate investors have honed down their skills of analyzing and assessing real estate opportunities to multiply their returns and increase their wealth in the long term.
Head over to Mashvisor to start your real estate investing today!