Investing in Residential Real Estate & Computing The ROI

Real estate investor signs mortgage for a new rental property.

Investing in residential real estate can be a very promising investment for the investor who has taken the time to research and plan for the opportunity. Anyone who wants to invest in residential real estate property can benefit from knowing how to calculate the property's return on investment, or ROI. The return on investment calculation allows the residential real estate investor to compare his property's investment return against other investment properties. Knowing the return on investment of different residential real estate properties allows the investor to make informed decisions about where to invest.

Instructions

1. Calculate the equity investment amount needed to finance a residential real estate property. For instance, an investor might need an equity investment of $40,000 as a down payment for a mortgage on a property that is valued at $200,000 (200,000 X 20% = 40,000).

2. Calculate the property's net operating income by subtracting the residential property's expenses from gross rental income. For instance, the rental property might collect $800 in rent per month and cost $180 per month to operate. In this case you would multiply the monthly rent of $800 by 12 and then subtract from this number 180 times 12 for an annual net operating income of $7,440 (800 X 12 - 180 X 12 = 7,440).

3. Calculate the total amount of net profit on the residential property by subtracting taxes and mortgage payments from net operating income. For instance, if your property's net operating income is $7,440 and your mortgage payments and taxes equal $3,000, you would subtract the $3,000 from the $7,440 to arrive at a net profit of $4,440 (7,440 - 3,000 = 4,440).

4. Calculate the property's return on investment by dividing the net profit by your equity investment. For instance, if the net profit is $4,440 and your equity investment is $40,000, then your return on investment in the property would yield 11 percent [ ( 4,440 / 40,000) X 100 = 11 ].

Tips & Warnings

• Compare your property's return on investment against the return on investment of other properties and other assets such as mutual funds.

References

• RentalOnline.com: Rental Property ROI