# How to calculate the roi of rental properties

## Chồng giết vợ rồi bỏ vao thùng nước ở sai gòn – [tin mới 123] (october 2022)

Everyone knows the meaning of return on investment (ROI) – the popular and versatile tool for finding out how your portfolio is performing. If you have a rental property, it is important to know how the ROI is calculated so that you can determine its effectiveness as an investment.

Because ROI calculations can be easily manipulated – and certain variables can be either included or excluded in the calculation – a meaningful ROI can be challenging, especially when investors have the option of paying money down or taking out a mortgage on the property. Here we look at two basic examples of how to calculate the ROI of residential real estate.

## A quick refresher

Return on investment is a measure used to estimate and evaluate the performance of an investment or to compare the performance of different investments. To calculate ROI, the net profit of an investment is divided by the amount of money invested and the results are expressed as a percentage or ratio.

For example, if you buy ABC stock for \$1,000 and sell it two years later for €1,600, the net gain would be \$600 (\$1,600 to \$1,000). The ROI on the stock would be 60% (\$600 ÷ \$1,000 = 0.60). (for more information, see: FYI on ROI: a guide to calculating return on investment .)

## Cash transactions

If you buy a property outright, calculating your ROI is relatively easy. Suppose you pay cash for a rental property of \$ 100, 000. You will also pay \$1, 000 in closing costs, plus \$9, 000 for remodeling, making your total investment in the property \$110, 000.

Fast forward one year. You have collected \$800 in rent each month, reaping \$9, 600 for the year. For the most realistic ROI, we subtract \$167 per month from this cash flow (2.004 USD per year) to cover property taxes and insurance (two expenses you can't avoid). This gives them an annual return of \$596.

To calculate the property's ROI, divide the annual return (\$7, 596) by the total investment you originally made (\$110, 000). \$ 7, 598 ÷ \$ 110, 000 = 0. 069 or 6. 9%. Your ROI is 6. 9%.

## Financed transactions

Calculating ROI for funded transactions is a bit more complicated. Assume you are buying the same property in the amount of \$100, 000 as described above, but instead of paying cash, you take out a mortgage that makes a down payment of 20%. Your costs are \$ 20, 000 for the down payment (\$ 100, 000 selling price x 20%); \$ 2, 500 for closing costs (they are higher because of the mortgage) and the same \$ 9, 000 for the remodeling. Your total expenses are \$ 31, 500 (\$ 20, 000 + \$ 2, 500 + \$ 9, 000).

In addition, there are ongoing costs for the mortgage. Let's say you took out a 30-year loan with a fixed interest rate of 4%.On the borrowed \$80, 000 (\$100, 000 sale price less the \$20, 000 down payment) the monthly principal and interest payment would be \$381. 93. We will add the same \$167 per month to cover taxes and insurance, making their total monthly payment \$548. 93. Note: a good tool for calculating the total cost of a mortgage is a mortgage calculator such as the one below.

Now let's take rent into consideration. Assuming your tenant pays €800 every month, you have a cash flow of \$251. 07 monthly (\$800 rent – \$548. 93 mortgage payment). Fast forward another year. Multiply this \$251. 07 of 12 determines her annual net income, or return: \$251. 07 x 12 = \$ 3, 012. 84.

Next, divide the annual cash flow by your original outlay (down payment, closing costs and remodeling) to determine the ROI. \$ 3, 012. 84 ÷ \$ 31, 500 = 0. 095. Your ROI is therefore 9.5.

Some investors add equity to the equation (keep in mind that equity is not cash they can spend; they would have to sell the property to actually access it). To get the amount of equity, check your mortgage amortization schedule to find out how much of your mortgage payments went toward paying off the principal (which builds equity). This is equity that can be added to the cash flow figure. In our example, the amortization schedule of the loan shows that \$ 1, 408. 84 of the capital paid out in the first 12 months. So, \$ 4, 421. 68 (\$ 3, 012. 84 annual income + \$ 1, 408. 84 equity) ÷ \$ 31, 500 = 0. 14. Result: an ROI of 14.