The measure of return on a particular investment over a set period of time is called Return on Investment (ROI). It is calculated and expressed as a percentage of the total investment cost.
Like any other indicator, the return on investment plays a very important role in the real estate industry. It is used to measure the performance of real estate investment opportunities.
The greater the return on investment, the more investors are attracted to real estate projects.
If you also invest in a real estate project and want to know your expected capital gains in the future, then we are here to help. In this blog, we will guide you on how to calculate the return on investment in real estate.
How to calculate the Return on Investment of a Property in a few Simple Steps
To begin with our guide to calculating the Return on Investment (ROI) in real estate, first, we have to take a look at the detailed definition of the term itself.
Defining the Investment Return
Return on Investment (ROI) is an accounting terminology that is widely used in a variety of business and investment fields. It summarizes the amount of profit that may be the outcome of an investment over a certain period.
As discussed, it is always indicated as the percentage of the invested money, which has been recouped after the deduction of all the associated costs.
The Formula Of Calculating Investment Return Of The Property (ROI)
The formula of ROI calculation in real estate is very simple. Let’s take a look at it:
ROI = (Investment Gains Initial Investment Costs) / Total Cost
You need to subtract your initially invested money from Final Value of Investment represented as Investment Gains in the formula and divide it by total Investment Cost, which is your initial investment plus all other associated costs.
The formula we have mentioned above may seem easy to work upon but there are certain cost factors that you need to consider while calculating your property’s ROI.
They may include repairing and maintenance costs as well as the amount of money (with interest, if it’s a loan) you may have borrowed while making the investment. All these costs have an evident impact on ROI in real estate investing.
What Is A Good Investment Return For The Real Estate Investors?
Anything above 8% is what most real estate investors and stakeholders consider as a good return on investment (ROI), However, it’s always a good idea to aim for something better like more than 10% or 12%, considering all the budget-busters and hidden costs involved.
This is why ROI is one of the most important factors that can make or break real estate investment deals.
Investors gauge the performance of investment opportunities based on their real estate value, expecting high cash returns in their preferred location.
Factors Impacting The Value Of Property
When aiming for good ROI while making a real estate investment, here are a few important factors you need to consider.
Location: The very first thing you need to check about a particular real estate project is its location.
Ideally, it should be well-connected to the major arteries of a metropolitan area. Investment opportunities near the city center are considered preferable if you aim to enjoy high capital returns.
To learn more about the significance of the location for an investment property, read this blog.
Condition: If you’re buying a property in bad shape, your maintenance and repair costs may increase. So, if it suits your budget, try to opt for a property that is in good condition.
Market Value: The market value of a property is affected by a lot of important factors. The occupancy rate, as well as the fluctuation in graphs of demand and supply, directly impact the real estate value of a particular area.
So, make sure your investment decision is backed by proper research. You can even take a look at Zameen.com’s trend section and property price index to find out about the top-performing neighborhoods and property types across the country.
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