ROI stands for Return on Investment. ROI is a common, popular and easy-to-calculate metric that many people use when they’re comparing one property to another or one investment to another. When you can increase your ROI, you’ll earn more money on your investment home.
Maintaining your home in excellent condition, avoiding long vacancies, and earning higher rental rates are all ways to increase your ROI. Short term cash flow is often a goal for most property owners. However, you want to think about your long term returns as well when you’re planning your investment strategy.
To calculate ROI on an investment property, you will need to start with two numbers. The first is the amount of cash or profit you expect to earn over the given holding period. The second is the cash you have invested into the property, otherwise known as your “basis” in the property. To calculate ROI, divide the cash you will earn on the property by the basis, or the total investment that you’ve made in the property. It is expressed as a rate or a percentage, much like a CD at a bank.
Once you understand how to use ROI when making investment decisions, you can use it as a good stepping stone to learning some of the more advanced metrics used in commercial real estate. There are limits to looking only at ROI, however. For example, it does not take into account the time value of your money. So if you’re using your ROI calculations to compare two investment properties that you’re thinking of purchasing, be sure to compare the same time period. Compare one year to one year, otherwise you will need a different calculation to get accurate results.
A good property management company can be helpful in earning a higher return. If you have any questions about what you can do, please contact us at Access Property Management Group. Call us at 616-301-9450 in Grand Rapids or 269-220-6033 in Kalamazoo.
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