RETURN ON INVESTMENT
If you are buying a property you’ll want to earn a return on the investment you’ve made. We can also say that when you buy a property you are looking to buy the best option available for the money that you have.
Sounds pretty simple, but before buying you need to make sure you are making the smartest choices so you won’t get stuck maintaining the property longer than needed and taking money from your bank account to cover any negative cash flow.
As you can imagine, covering negative cash flow is never a good investment strategy. Let’s take the following chart as a sample.
As you can see, it is extremely important that you include the property specifics into your analysis. Whether you buy to rent or to sale do some research on realistic rents and selling prices, vacancies, and expenses to make a decision.
Will your investment property be for you to resell (usually giving you a greater faster return) or to rent (usually giving you a steady lower return)?
For either option, “location, location, location” is one of the important factors to consider if you want your property to give you the greatest return. Having an Oceanfront and/or Ocean view is something that you need to consider since these properties are almost guaranteed to hold and/or increase value. Yes, these properties will be at a premium but yes, you are looking at an investment.
If you decide to rent out your property, depending on your purchase price, you can make anywhere from 6- 10% return or more on long term rentals. If you focus on short term rentals, depending on your purchase price, you can have anywhere from 18-20% return or more.
Buying to sell can also make an attractive return percentage. You can either buy a home that is ready to be resold making you quick money or focus on a fixer-upper. Fixer-uppers can be attractive since you can probably get a larger return amount on your investment. However, it is important to also consider all the issues and/or additional expenses you can encounter along the way.
We can always follow the following standard formula to calculate Return on investment over a determined period of time to make a more educated purchase.
Without any reinvestment, a (return) R over (a period of time) t is equivalent to a rate of return:
Here is an example of a scenario where the property purchased was rented for a period of 12 months.
$15,000 return on an initial investment of 100,000 USD is a return of 15%.
If the 15,000 USD is paid in 12 monthly installments of $1,250 USD per month, with no reinvestment, the rate of return is:
$15,000 (amount of return) / $100,000 (Initial investment) =15% / 1(year) = 15% per year