There are several ways to evaluate a piece of real estate when it comes to investing, but today’s topic focuses on return on investment, or ROI.
ROI is the rate of return you can expect to receive on an amount of money invested either as a rental or as a quick turn around.
It’s one way to help keep your flip from becoming a flop.
For example, let’s look at a home costing $200,000 that you plan to rent for $1500 per month and you are financing 80% of the purchase price. We will take into account the down payment, annual taxes and insurance, and the principal and interest payments on the home; collectively this is known as PITI… subtract that total from your total rent and that is our net cash flow. Multiply by 12, divide that by the down payment and you have an annual ROI.
Both Rentals and Flips have their advantages and their disadvantages… Flips bring in fast cash and no rental headaches. Rentals can bring tenant issues, but with a property that is in high demand and good renters, you are having your principal paid down for you, you are getting good ROI, and in the long term you should reap the reward of selling in a bear real estate market. But like any investment, there is always risk and not all situations are the same… like anything else there is no guarantee for real estate riches. What matters most is how investors can perform their due diligence so they feel comfortable with the purchase enough to take that risk.
See the below examples for hypothetical ROI in a rental and flip scenario:
For a Rental Property:
$200,000 X 20% = $40,000 down payment
PITI = ~ $1200 per month at 6% interest
Monthly Net = $1500 – 1200 = $300
Annual Projected Net = $3600
Annual ROI = 9%
For an Investor Flip:
$200,000 purchase price
$40,000 in renovation and any carrying costs
$300,000 is new market value
New market value ($300K) – total investment ($240K) = $60K
$40,000 / 60,000 = 67% ROI