The term Return on Investment (ROI) is used as a prime indicator of the profitability of the stakeholders in the real estate domain. It is the amount of profit earned through investment compared to the percentage of the investment cost. Hence, getting an accurate measure of the ROI is essential, especially for your real estate property.
Now, how exactly do you calculate ROI for your rental? It can be advantageous to consult an established property management consultancy with expertise in ROI calculation for real estate. Along with a precise calculation of ROI, the experts can also provide other suggestions that are most suitable for your investment.
In order to calculate return on investments, you will need particulars such as the cost of the property, potential maintenance expenses, mortgage details, your rental income, as well as monthly and annual leasing costs.
How To Calculate the ROI of Your Merced Rental Investment?
There are three basic methods of calculating ROI, the formula, the cost method, or the out-of-pocket method.
The fundamental formula of calculating the ROI is to subtract the Cost of Investment (COI) from the Gain of the Investment (GOI) and divide it by the Total Cost.
ROI= GOI-COI / Total Cost x 100
The formula appears to be simple. However, it involves several complex factors, including the cost of the rental property, maintenance costs, monthly and yearly leasing charges. Using rental property calculators, like the one offered by River Drive Properties, can make your job easy.
The Cost Method
The cost method is another effective method for calculating the ROI of your real estate. It implies division of the equity position of property by all the asset-related expenses, including the cost of the property, maintenance, and repairs.
The Out-Of-Pocket Method
The out-of-pocket method suggests the utilization of financed transactions in the formula. For example, if you lift a mortgage with a 20% down payment as a substitute for cash payment, you only have to pay the out-of-pocket expenses for the down payment and the repairs.
The common rule implies that the less cash that you invest in real estate, and the more that you borrow leads to the greater ROI. Most investors go for the ROI method as it results in higher ROI results.
Common Terms You Need to Know While Calculating the ROI
- Net Operating Income (NOI): The profitability of your investment is represented by the NOI. The NOI is estimated by the subtraction of the gross income from the operating expenditure of your property.
- Cap Rate: The cap rate, which is also referred to as the capitalization rate is the rate of your return. It allows you to easily estimate rental investment opportunities. The cap rate can be estimated by the division of your NOI by the rate of the property.
- Cash-On-Cash Return: The cash-on-cash return is the return that you receive from your rental investment. The return can be calculated by the division of the after-tax annual cash flow by the amount that you pay to buy the property.
- Annual Gross Rent Multiplier (GRM): The GRM supports the measurement of the value of the rental investment. The GRM can be calculated by the division of the total sales price by the yearly gross rent.
- Annual Cash Flow: The annual cash flow is estimated by subtracting the debt amount from the net operating income. The number represents the profit or loss that you will be left with after covering the mortgage payments and the expenses.
Complications In Calculating ROI
The factors that influence the ROI keep changing. There could be unwarranted repairs and other maintenance issues. More significant problems arise when there are alterations in financial terms, like refinancing the property, increased interest on the secondary loan, as the second mortgage loan is often paid after the first loan is paid off completely.
There is an increase in your repayment as the market rates escalate. The ROI estimation can even be affected when you take longer to repay the loan, as the interest also keeps increasing.
The complications in calculating the ROI differ from case to case, depending upon the types of loans. As critical as it is to calculate the ROI of your Merced property, it is a complex job that necessitates skills, experience, and a good knowledge of finances.
River Drive Properties has been in the Merced property management business for over 26 years. Our team of experts can help you effectively calculate the ROI of your Merced property after assessing all the factors in detail. For more information on calculating the ROI of your Merced real estate investment, contact us at River Drive Properties.