Many times, people who buy real estate for rental purposes don't "do the math" periodically to track how their investment is performing. Obviously, you should treat rental real estate investments the same way you treat your stock or mutual fund investments ... you need to know the Return on Investment (ROI). We recommend that you recalculate the ROI at the beginning of every year.
As an example, you invest $20,000 cash to purchase a single-family home with a market value of $120,000 (so you have a $100,000 mortgage). At the beginning of the purchase, you have $20,000 invested. If you are able to collect net income (after mortgage payments, taxes, insurance, etc.) of $415 per month, you would be receiving a 25% ROI as shown below:
x 12 / Your Equity Investment
Looking at this same property after five years, the numbers look vastly different. Due to appreciation, the home is now worth $145,000 based on the comparable properties in the area. Also, the amount of rent collected has increased, so the net income is $475 permonth. The mortgage value is now $10,000 less because of the mortgage payments that were made. This means that the Equity Investment is now $55,000 ($20,00 + $10,000 + $25,000). The formula is the same, but the numbers are different:
x 12 / Your Equity Investment
The difference in the ROI that happened over 5 years is because the equity in the property increased to $55,000, but the income earned has not increased relative to the investment. If the house were sold today, it would result in a $145,000 sale and a mortgage pay-off of $90,000, leaving proceeds of $55,000. This money could then be used to purchase another property or another investment at a higher rate of return. In this type of situation, there are a few options ... selling the property, raising the rent to increase the ROI, or re-financing the current mortgage based on the new value, taking cash out to reduce other debt or to purchase another investment. Which of these options is right for you is something that you should weigh carefully and discuss with your financial planner.
We developed an Excel Spreadsheet that you can use to determine the potential Return on Investment for your properties. All you need to do is click on the link above and then click on OPEN. Once you plug in the appropriate numbers, you can SAVE the spreadsheet for your future use! Feel free to use it for multiple properties ... and then Contact Us to help you with your properties.
This is a relatively simple analysis tool for finding out quickly the investment potential of a home. We will be happy to help you to do an in-depth analysis ... we consider the market area the investment and the individual homes are the assets.
The Owners and Agents at DMS Properties, LLC ... Residential Real Estate Services are actively working on purchasing investment properties in Maryland for our own portfolios ... we are anxious to help other investors who are interested in a buy - fix - hold philosophy to accumulate wealth. With that in mind, we are in the process of investigating the formulation of an investment group whereby interested investors join forces to purchase investment properties together.
If you have an interest in investing in residential real estate in Maryland, but don't feel you have sufficient knowledge or funds to accomplish it on your own, Contact Us so we can discuss a potential partnership. We are developing the necessary "operational agreement" that would outline the role that each participant would play in the venture. It would naturally pass a review of our legal counsel, too, so that we make sure that everything is being done right!