•In the last 10 years Bend has experienced some of the highest real estate appreciation rates in the US. • So…Owning a home is more than an address, when you invest in homeownership you build financial stability, and gain the freedom to create a home that fits your lifestyle and you play a role in strengthening your community! • Today we wanted to share with you some information about your Return on investment (ROI) as a part of Homeownership Month. • In real estate we measure how much money or profit is made on an investment as a percentage of its cost. Since this metric shows how well your investment dollars are being used, it pays to know both what ROI is and how to calculate ROI in real estate. Calculating ROI isn’t difficult...here's how! FIRST Figure out the INCOME: YOUR Equity = You plan to sell your RENTAL home for $500k. You owe 300k – your equity is $200k 1. FIGURE YOUR Gross Rent – $2000 a month = $24,000 annually 2. Principle Reduction – $5000 3. Appreciation –estimate. Conservatively. 5% annually = $25,000 4. TOTAL INCOME $254,000 NEXT figure out the EXPENSES: 1. Taxes = $3000 2. Insurance = $500 3. HOA Fees = $500 4. Property Management Fees $2,400 5. Vacancy/Repairs: 10% + 10%. $4000 6. Debt Service = Monthly Mortgage Payments $1200 a mo = $14,400 7. TOTAL EXPENSE $26,400 LASTLY - Subtract your estimated expenses from your income. $26,400 = $227,500 = 11.5%. Our example was over 1 year.. many investors figure longer term – i.e. 5 years+
What is a good ROI for real estate? • It varies by risk tolerance—the more risk you're willing to take, usually the higher ROI you'll expect.
• Risk-averse investors may happily settle for lower ROIs in exchange for more certainty. • ROI measures how much money or profit is made on an investment as a percentage of the investment's cost. • It shows how effectively and efficiently investment dollars are used to generate profits. • Many investors use the average returns on the S&P 500 as a benchmark for how much Real Estate ROI they want to make. Historically S&P 500 averages about 10%. • Of course, you don't always have to buy physical property to invest in real estate. • Real estate investment trusts (“REIT”s) trade like stocks on an exchange and provide diversification without the need to own and manage property. • In general, “REIT” returns are more volatile than physical property. • In the U.S., the annual return of REITs is 12.99% • Think about your investment goals, & risks associated with • For instance… the property's location, and the size of the property. • Some real estate experts would argue that a 7.2% ROI would suffice. But, others wouldn't settle for anything below 30%. • On average though, aim for an ROI 15% • With ROI a number of variables come into play, including repair and maintenance costs, • as well as leverage—the amount of money borrowed (with interest) to make the initial investment. • There are variables that can affect ROI numbers. • For instance .. when you buy property, the financing terms can greatly impact the overall cost of the investment.
• Luckily right now there are some fantastic mortgage products that help our investments especially our historically low interest rates.
• But sometimes when we a property is refinanced or a second mortgage is taken out. Interest on a second, or refinanced loan may increase, and loan fees may be charged—both of which can reduce the ROI.
• There may also be an increase in maintenance costs, property taxes, and utility rates. All these numbers need to be plugged in to update ROI along the way.
• You may have more Complex calculations if the property is bought with an Adjustable-rate mortgage (ARM). A loan with a rate that changes periodically through the duration of the loan. You ROI may adjust accordingly.
• Also, there are costs associated with selling a real estate property, such as funds expended for repairs, painting, and landscaping.
• The costs of advertising the property should also be added in, along with appraisal and commissions expenses.
The Bottom Line
• Calculating ROI on real estate can be simple or complex, depending on all the variables we talked about today.
• In a robust economy, investing in real estate has proven to be very profitable. Even in a recessionary economy, when prices fall and cash is scarce, many bargains in real estate are available for investors with the money to invest.
• When the economy recovers, as it inevitably does, many investors can reap good profits.
Disclaimer…For income taxes or capital gains tax purposes, get professional tax advice from your accountant.