In the last 10 years Bend has experienced some of the highest real estate appreciation rates in the US. 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!
We want to share with you some information about your Return on investment (ROI)
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. Below is an example of how calculate ROI.
1. 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
2. Figure out the EXPENSES:
1. Taxes = $3000
2. Insurance = $500
3. HOA Fees = $500
4. Property Management Fees $2,400
5. Say its Vacant 10% of the time and Repairs costs are at 10% that would equal $4000
6. Debt Service or your Monthly Mortgage Payments which are $1200 a mo = $14,400
7. TOTAL EXPENSE $26,400
3. 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+
You may wonder what a good ROI is for real estate? It varies by risk tolerance—the more risk you're willing to take, usually the higher ROI you'll expect. If you are a risk-averse investor, you 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 historic return over time for 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 around 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. Look for mortgage products that might help your investment. 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 or help you to purchase another investment.
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.
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.