Return on Investment (ROI) is a measure of how much money an investment has earned over a period of time, typically expressed as a percentage. When it comes to real estate, calculating the potential ROI of a property can help you determine whether or not a particular property is a good investment.
Here are the steps to calculate ROI on a rental property:
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Determine the property's income: Calculate the expected rental income by taking the monthly rent and multiplying it by the number of months in the lease.
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Determine the property's expenses: Identify the ongoing expenses for the property, such as property taxes, insurance, repairs, and management fees.
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Subtract expenses from income: Subtract the expenses from the income to find the property's net operating income (NOI)
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Divide the NOI by the initial investment: take the NOI and divide it by the initial investment (the purchase price of the property, plus any closing costs and repairs). This will give you a percentage that represents the return on your investment.
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Compare it to other investments: compare the ROI of the rental property to other investment options.
For example: A rental property has an expected rental income of $1,200 per month, and its expenses are $300 per month. The property's net operating income would be $900 ($1,200-$300) per month. If the property cost $100,000, including closing costs and repairs, the ROI would be 9% ($900/$100,000).
It's important to note that the above method is a simplified way of calculating ROI, and in reality, you have to consider many other factors such as vacancy rates, price appreciation, taxes, financing costs and more.
