Here are a few questions you might have before you buy that investment property: How to determine ROI on a rental property? What's the best way to work out the return on an investment property?
If you're new to investing in real estate then you'll need to understand and learn the formula for calculating a return on an investment, otherwise known as ROI. How do you calculate ROI? Let's follow the simple steps for the calcuation below. It's helps to use a property investment as an example:
ROI = Appreciation + or - the Cashflow, then divided by initial investment
Example property investment ROI:
Purchase Price: $449,900
Cash Flow: $200 negative cash flow per month
$449,900 x 6% = $26,994
Negative cash flow for year = $2,400
$26,994 - $2,400 = 24,594
$24,594 divided by $45,000 = 54% ROI for the first year
In the above example there was substantial appreciation, so that's why despite the negative cash flow the return on investment was still high. Remember though, in the real world you'd also deduct taxes, insurance, repairs, general upkeep, and any other expenses.
But what if you put more money down in the above example: If you put 20% down ($90,000) and you have $300 positive cash flow your ROI would be $26,994 + $3,600 divided by $90,000 = 34% ROI
In summary, based on the assumption of 6% appreciation and the cash flow, putting 10% down will give you a better return on investment or ROI.
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