How to Calculate ROI on Your Investment Property
Commercial and residential real estate markets, post Covid, have seen their fair share of ups and downs. As we have seen with the very public recent trials of ex-President Donald Trump, calculating your Return on Investment (ROI) and valuing your real estate investment is crucial for assessing its profitability, long-term viability, and the asset value in your portfolio. Ali Choudhri, CEO of Jetall Capital, shares some basic yet essential steps to calculate ROI effectively, offering valuable insights to property investors and stakeholders.
Determining ROI for your real estate investment is based upon absorbing the data and interpreting it properly, such that you can make well-informed investment decisions in the future.
Identify Your Investment Objectives: Before delving into calculations, define your investment goals. Are you looking for long-term cash flow, property appreciation, asset acquisition and relative safety in your investments? Understanding your objective is the key to understanding what you invest in and what ROI expectations you will have on that property.
- Gather accurate data: Accurate data is the bedrock of ROI calculations. Collect comprehensive information on property acquisition costs, financing expenses, operating costs, credit risks, and potential rental income. That includes credit risks,
- ROI calculation formula: Use the ROI formula: ROI = (Net Profit / Total Investment) x 100. This formula accounts for both immediate income and long-term appreciation. So, if you bought a property for $500,000 and sold it for $2,000,000 it would be:
ROI = (2,000,000 – 500,000) / 500,000 = 3
x 100% = Total ROI of 300%
- Net profit calculation: Calculate net profit by subtracting all costs, including taxes, insurance, maintenance, and financing expenses. You do this for a total project investment, but you can also calculate your net profit from rental income.
- Where it gets trickier is if you buy, hold for a while, earn rental income, then sell – In truth your rental income net profit (or loss) adds to the total ROI of a project. For example, you cannot say you lost money or broke even if you bought a property, earned rental income and net profits for 20 years, sold it for the same amount, but the rental income not only paid yourself but also paid the property note off and satisfied the project interest and expenses.
- Total Investment: Your total investment comprises the property purchase price, closing costs, and any renovation expenses.
- Account for depreciation: Remember to factor in property depreciation for a more accurate ROI calculation on properties you have held for any substantive length of time.
- Consider market trends when valuing a property: Stay informed about local market trends and economic factors that could impact your property’s value and rental income.
- Review periodic ROI: Revisit your ROI calculations periodically to track your investment’s performance and make adjustments as needed, especially important if you have loans on the property.
- Leverage technology: Utilize real estate investment software and tools to simplify ROI calculations and gain deeper insights into your investments, nowadays all of this is automated. No need for an abacus.
- Consult with experts: When in doubt, seek guidance from experienced real estate professionals or financial advisors who specialize in real estate investments specific to your target sector.
By following these steps, investors can gain a clear understanding of their commercial real estate investment’s ROI and future potential. Armed with this knowledge, they can make more informed decisions, mitigate risks, manage debt structure, and optimize their portfolio for long-term success.
“Calculating ROI for a commercial real estate investment is a strategic process that requires meticulous attention to detail,” says Ali Choudhri, CEO of Jetall. “Knowing the detailed facets of the industry in which you are trying to build wealth is crucial to your success, and will empower you to make well-informed choices that yield substantial returns.”
Ali further stated that, “With the major shifts happening in commercial, residential, multi-family and warehouse real estate, it is imperative to maintain a well-informed approach, rooted in data-driven decision-making.”