{"id":28048,"date":"2021-11-18T12:14:59","date_gmt":"2021-11-18T20:14:59","guid":{"rendered":"https:\/\/www.homelight.com\/blog\/?p=28048"},"modified":"2021-11-18T12:14:59","modified_gmt":"2021-11-18T20:14:59","slug":"buyer-real-estate-return-on-investment","status":"publish","type":"post","link":"https:\/\/www.homelight.com\/blog\/buyer-real-estate-return-on-investment\/","title":{"rendered":"Real Estate Return on Investment: What It Is and How to Maximize It"},"content":{"rendered":"

Most people in the market for property are simply looking for a place to live. But if you have higher aspirations for the money you are putting into a property, you may want to consider becoming a real estate investor<\/a>.<\/p>\n

But wait! Before you jump in with both feet, you must consider what the risks and the paybacks are going to be. In other words, what\u2019s your return on investment (ROI), and how do you assess the ROI based on your particular investment strategy?<\/p>\n

We asked two real estate and investment professionals to offer tips for discerning your ROI on various real estate investment scenarios.<\/p>\n

Jodi Steinberg<\/a>, a senior residential real estate agent in Kansas City<\/a> with four decades of real estate experience, details specific client experiences with investment properties, and Nick Pietrocola<\/a>, financial advisor and Vice President with Ameriprise Financial in Cleveland, Ohio, shares the advantages of real estate investment trusts as an alternative strategy. Let\u2019s see what they had to say!<\/p>\n

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Source: (Roman Skrypnyk \/ Unsplash)<\/figcaption><\/figure>\n

Calculating real estate return on investment<\/h2>\n

There are a lot of ways to calculate real estate ROI<\/a>, but as with any investment, the basic formula is \u201cgain minus cost\u201d \u2014 or how much you earn versus what you pay to invest in the property.<\/p>\n

Stock investments can provide a simple example of ROI. If you invest $1,000 in the stock market and then five years later sell your shares for $1,500, your net profit is $500. Your $500 gain divided by your original investment of $1,000 is 0.50, or 50% ROI (10% per year).<\/p>\n

Calculating ROI for rental or fix-and-flip properties is far more complex, with many variables to consider. Whether you are considering what to buy and when to buy, or whether to flip or lease, working with an experienced real estate agent<\/a> can help you maximize your ROI and avoid possible pitfalls that could negatively affect your return.<\/p>\n

Factors to consider when maximizing your ROI<\/h2>\n

Steinberg works with a variety of real estate investor clients, including those who buy for the purpose of fixing up and reselling, and those who intend to rent out homes, condominiums, or apartments.<\/p>\n

The challenge for every investor, according to Steinberg, is to maximize the return on their investment. For a hands-off real estate investment, such as REITs (real estate investment trusts), this can be relatively straightforward. But when you get into strategies like buy-and-hold (also known as becoming a landlord) or fixing and flipping, there are many more variables to consider.<\/p>\n

\u201cWhen working with any type of investor, I feel like my first job specifically is to make sure that my client buys right, so when the time comes to sell, they can sell at a profit,\u201d she explains.<\/p>\n

This is a bit more critical for a fix-and-flip that you intend to sell quickly, but it is also essential for a rental property because you will also benefit from the accrued value of the property over time.<\/p>\n

Steinberg first encourages her clients to consider location<\/a> based on their investment strategy.<\/p>\n

If you are intending to buy a house for the purpose of fixing it up and selling it, then it would be helpful to buy a fixer-upper in a neighborhood that is on the upswing so that you can hopefully find a buyer willing to pay a premium price for a renovated property.<\/p>\n

\u201cIf you have a flipper who doesn\u2019t know what they’re doing, and they buy way too high, they may not make much money on it,\u201d Steinberg says.<\/p>\n

Along the same lines, if you are trying to rent the property, you have to ensure the rental income you need to cover your investment is competitive in the location where you intend to buy, Steinberg says.<\/p>\n

\u201cIt seems ridiculous to say \u2014 but location, location, location, is true,\u201d she says.<\/p>\n

ROI for rental properties<\/h2>\n

Your rental return on investment will depend on the price of homes where and when you buy, as well as the fair-market rental rates in the area. Buying wisely and fixing up prudently in desirable areas could generate the greatest ROI.<\/p>\n

Calculate initial purchase<\/h3>\n

First, you will want to consider how much you intend to put down to buy the property and how much your monthly mortgage payments will be. Remember, a larger down payment means lower monthly mortgage payments.<\/p>\n

Determine how much to invest<\/h3>\n

Secondly, consider how much you want to invest to fix up the property. This is where it can get tricky, Steinberg says.<\/p>\n

She has one client who often invests heavily in the properties he purchases.<\/p>\n

\u201cHe\u2019ll paint everything and put in new cabinets,\u201d she says. \u201cHe is against any carpet in rental properties, which I agree with. It costs a little bit more money upfront, but he puts hardwood [flooring] in everywhere, and tile in the wet areas. If you have renters for a couple of years and they have kids and dogs, the carpet will need to be replaced. But if you have hardwoods, they hold up over time.\u201d<\/p>\n

She said her client also makes sure the electrical system is up to date, as well as the HVAC and roof.<\/p>\n

\u201cHe wants very little trouble after people move in,\u201d she notes. \u201cHe gets good rent because he has a specific high-end area where he purchases.\u201d<\/p>\n

The upside to making a substantial investment in the property, Steinberg says, is that her client can charge a premium in monthly rent. That said, although he gets a good return on his investment, it takes him a few years to earn that return because he puts so much in up front.<\/p>\n

To maximize ROI on more modest properties, she advises looking for homes that are in good condition, requiring only a minimum investment for cosmetic updates and repairs.<\/p>\n

Analyze rent income potential<\/h3>\n

The third thing to consider is how much you can charge to rent the property. As Steinberg noted, this is often dependent on what the going rate is in the area you are targeting.<\/p>\n

If you are purchasing a property with multiple units, you may also want to investigate the current tenant situation. Having renters in place will provide immediate income for your investment. If not, at least do the research to find out what renters paid in the past or are currently paying in the area.<\/p>\n

Estimate additional and ongoing expenses<\/h3>\n

In addition to the initial investment in your rental property, there will be ongoing expenses you will need to take into account when calculating your ROI. Expenses to consider include:<\/p>\n