(Newswire.net — January 10, 2022) —
The last few years saw massive growth in real estate sales, particularly among homes. 2020 alone, for example, saw approximately 5.6 million existing homes sold. Of course, the low inventory level of houses contributed in part to the rising price of new homes.
Those rapidly increasing prices create something of a quandary for homebuyers who typically end up financing property. Specifically, it changes the name of the game in terms of return on investment.
Not clear on ROI and why it matters in terms of purchasing real estate? Keep reading for a quick overview of ROI and why you should consider it before buying property.
What is ROI?
ROI or return on investment means how long it will take before you can reasonably see a profit from selling an investment. Let’s work with a relatively simple example.
Let’s say you invest $5000 in a company’s stock. For simplicity, let’s say that you pay $200 in brokerage fees. Your total for the investment is $5200.
You get a return on investment when the value of the stock rises enough that selling it will recoup you the initial $5200, offset the additional brokerage fees for selling the stock, and hopefully net you some profit.
Why ROI Matters for Real Estate
So, how does the question of ROI apply with real estate purchases? In the case of property, that means the amount of time you must own a property before it makes sense to sell it off. It’s also a pertinent question because many homes selling these days go in the $300,000 range.
With an investment that large, you want a clear sense of just how long you must own and maintain a property before you can reasonably get out and, for example, move somewhere else.
That means you must understand your ROI or, in real estate parlance, your break-even point. The break-even point comes when you pay down enough of your mortgage that, if you sold today, you won’t lose money.
It’s a little trickier than it sounds because you must consider the costs of buying and selling, such as realtor fees, renovations, and repairs.
How Do You Calculate ROI?
Let’s say that you look at investment properties on a site like memphisinvestmentproperties.net. How would you calculate the ROI on those properties?
The simplest method is using a real estate ROI calculator tool, which helps you assemble all the right information. It considers the total debt, rental income, projected upkeep and management fees, and potential appreciation of the property value. Then, it gives you estimates based on the time of ownership.
Financing Property, ROI, and You
Financing property means you must consider the time until you can reasonably see an ROI from your investment. For something like a home, it generally takes from around five to seven years before you reach the break-even point. That means you need more time before you see a legitimate ROI.
For investment properties, you should find a good ROI calculator tool to help you assess your ROI time.
Looking for more real estate investment tips? Check out the Real Estate posts in our Business section.