How to Calculate ROI on Your Investment Property. A Quick & Dirty Guide

Hey there, future moguls! Ready to dive into the nitty-gritty world of numbers? Don’t fret! I’m here to guide you on calculating the return on investment (ROI) for your property. It’s not as scary as it sounds, I promise!

What the Heck is ROI Anyway?

ROI, or Return on Investment, is basically a percentage that tells you how much money your property is earning compared to its costs. It’s like a report card for your property. You want to see A’s here, folks!

The Magic Formula

Here’s the magic formula you’ve been waiting for:

ROI = (Annual rental income - Annual expenses) / Total property cost * 100%

Pretty simple, right? Let’s break it down:

Annual rental income: This is the money you get from your tenants over a year. Just add up the monthly rent you charge them.
Annual expenses: These are all the costs you have to keep the property running. Think property taxes, insurance, repairs, vacancies, and so on.
Total property cost: This is the total amount you paid to buy the property. Don’t forget to add all the other costs like closing costs, renovation expenses, etc.

Multiply the result by 100% to get a nice, tidy percentage.

Example Time!

Let’s do a quick example so you can see how it works:

Suppose you bought a property for $200,000, spent $20,000 on renovations, and another $5,000 on closing costs. Your total property cost is $225,000.

You charge your tenants $2,000 per month, so your annual income is $24,000.

Let’s say you spend about $4,000 on annual expenses.

Plug those numbers into our formula:

ROI = ($24,000 - $4,000) / $225,000 * 100% = 8.89%

Voila! You’ve got an ROI of 8.89%. Pretty decent!

The Bottom Line

ROI is a super useful tool to help you evaluate your property’s performance. It’s not the only measure you should use, but it’s a good start. So get out there, start calculating, and let the numbers guide your real estate empire!

Remember, real estate investment is a long game. It’s all about that compound interest, baby! Good luck, and keep crunching those numbers!