Making an investment in any type of business comes with a whole list of expectations when big bucks are being invested. That is the case for all types of investments, and the main reason people invest in different types of markets is to make more money from the money they already have. The same applies for real estate investing. Purchasing an investment property has a purpose and it is to grow financially through using property investments to generate money either in the short or long term. This is what we call real estate return on investment, which is basically the profit you make after deducting all investing costs and expenses.
In real estate investing there are so many paths an investor can take in order to find a working formula which could provide him/her with significant real estate return on investment. But before getting into the best areas that could help you make a return on your initial investment, it is important to understand what makes a good return on investment in real estate. Basically, what does it mean to have a good return on investment? Is it something that you should always look for? How do you calculate your return on investment?
Calculating Real Estate Return on Investment
Return on Investment (ROI): This is believed to be the most important calculation by many investors regarding the success of their investment in the form of its profitability. The ROI is calculated annually for real estate investments through the cash flow, which is the difference between the rental income made per year and the annual costs and expenses associated with owning and managing the rental property. For example, if you purchase a rental property for $200,000 and pay $10,000 more in repairs and maintenance, then you have an initial investment of $210,000 in total. If you are renting the property for $3,000 per month for 12 months every year, then the total annual rental income will be $36,000. Moreover, let’s assume that the property requires a total of $2,000 in expenses per year. This means that the cash flow is $34,000.
Therefore, the ROI= $34,000/$210,000 = 16%
A ROI of 16% is considered an above average return, with 15% being considered a good ROI. The higher the return on your investment, the faster you will be able to break even on your investment property and start generating profit for your own pocket. Understanding ROI is easy, but being able to implement it in the market is what is more challenging. Real estate return on investment is a very important factor, so it is advisable to work towards achieving that average percentage needed.
Related: How to Calculate Return on Investment in Real Estate: 5 Different Ways
Strategies for Real Estate Return on Investment
To have an immediate real estate return on investment, then you should first consider fix-and-flips as your main strategy when investing in real estate. Fix-and-flips offer the investor a chance to make money on the initial investment in a short-term period. Fix-and-flip is basically the idea of buying properties that are in need of improvements or renovations in order to push their price way higher than what you bought them for. Therefore, when you sell the property after renovating it and making it completely new, you earn a substantial amount of profit by selling it to interested buyers.
This method offers a quick return on investment that was made while also being able to generate profit at the same time. For example, you purchase an old property in a central location for $100,000, knowing that the renovation costs would amount to $30,000. This means that your initial investment is $130,000. Knowing the real estate market and consulting with your real estate agent, you find out you will be able to sell it for $160,000 if it was a modern and brand-new-looking property. This results in you making a good return on your initial investment within a couple of months.
Related: Considering a Fix & Flip? Ask Yourself These 3 Questions First
Short-Term Rentals Strategy
One of the best ways to have excellent real estate return on investment is by considering the most trending and profitable form of rentals available at the market nowadays. Making money passively is what short-term rentals is all about, and nothing demonstrates that more than the success real estate investors have had in becoming Airbnb rental owners. Airbnb offers you a platform that could help you make a return on your investment faster than you expect.
Contemplate the idea of becoming a devoted host or hiring a property manager to look after your property while its being used for Airbnb rentals. Then think about the profit that you could be making per month compared to with long-term rentals. There is no denying that Airbnb rentals are more profitable than traditional rentals, with the only negative side being that Airbnb needs more time and work to keep its standard.
For example, consider the rental income from renting your 2-bedroom property for long-term rent to be around $2,000 per month. Then look at the rental income that can be made from Airbnb rentals per month, if you are renting the property at a rate of $100 per night. This rate, which is considered average, could bring you more than $3,000 per month. When considering ROI calculations, it is logically understandable that short-term rentals strategy gives you a better percentage on your real estate return on investment.
Buy-and-Hold Return on Investment
Real estate return on investment is not only a short-term option like fix-and-flips or Airbnb rentals. There is a long-term version of getting your initial investment money back too. That strategy is the buy-and-hold investments. Buying a property for the purpose of holding it, renting it out, and then selling it later in the future for a higher appreciation value is a common strategy used by real estate investors. This is perhaps the most common strategy used not just in the United States but also worldwide. Holding the property for a number of years allows you to be able to rent it for as long as you want, which makes you recoup some of the initial investment you have already paid through rental income. Then years later when the value of the property has appreciated to a satisfactory point for you, when selling the property would not only return the initial investment you made, but it can also bring you huge profit margins easily. Good real estate return on investment through buy-and-hold is almost guaranteed in the current healthy recovery of real estate markets nationwide.
Related: How to Buy and Hold Real Estate Property?
Real estate return on investment is one of the main reasons why people invest in properties. The idea of profit appeals to everyone, and it is also what every real estate investor works hard towards for many years. Understanding how ROI is calculated and what is needed gives you an insight on which real estate investment strategy you should follow. Making a strategy work, however, is solely dependent on how dedicated and creative you are in becoming a real estate success story.