How To Analyze Return on Investment from a Property on the Market Today
I was put in touch with a wealthy real estate investor who used to have his own financial advising firm.
He told me that stocks were not a good investment compared to real estate.
His reasons were that when you own real estate, you know what is happening with your investment. You are a true owner.
Owning stock, however, gives you no say in what the company does.
I thought about that a lot and wondered how I was going to get into the real estate investing space.
At the time, I had some money, but not the 30% down payment required to buy an investment property…which at the time properties were about $300,000.
You may be in the same situation as I was.
Well, my mentors with much more money than me have told me that it’s not having the money that’s important, it’s finding the deal that’s important.
If you find the deal, then someone with money will want it.
As a Mastermind Coach, I’ve noticed that the hardest thing for most people is how to figure if a deal is a good deal or not.
So let’s look at how to analyze if the property you find is a good deal or not a good deal.
House For Sale Example
Currently, in Oahu I found 1 house for sale, single wall, renovated, 3 bdrm 2 ba, on 5,000+ sq ft of land.
Here are the relevant details:
Listed Price: $359,000
Taxes: $100/month
Mortgage: 4.5%, 30 years, 30% down payment
So, how can you use these details to calculate what the Return on Investment (ROI) is?
Step 1 – Calculate Total Investment (the money you put down)
In our example, the money you put down is 30% of the purchase price.
If we offer $350,000, then 30% would be $105,000.
Step 2 – Calculate Total Profit/Loss (Income – Expenses)
The only way to figure out the income would be to look at similar properties in the area and figure out how much you could realistically rent the property for, and what the vacancy rate would be.
In this case, after looking at similar properties it seems that they rent for $2,250, with the tenant paying for all utility costs on their own.
Assuming that it takes 1 month to rent it, and we assume that vacancy rates would be about 1 month of every year.
Then we can estimate that we will make rent about 11 months of the year.
So Total Income would be $2,250 x 11 months = $24,750 per year.
In terms of Expenses, we need to pay the following:
Fire/Flood Insurance – $200/mo
Maintenance – $200/mo
Property Taxes – $100/mo
Mortgage Payment – $1,241.38/mo
Total Expenses / month = $1,741.38/mo = $20,896.56 per year
So Profit = Total Annual Income – Total Annual Expenses = $3,853.44
Step 3 – Calculate the ROI
To Calculate the ROI, then take the Annual Profit and divide by the Investment = $3,853.44 / $105,000 = 4%
Figuring Out if You Have a Good Deal
Now that you know that the property will make you 4%, you decide if that is a good deal.
So is it a good deal or not?
In the end it actually depends.
If you are a new investor and are only making 1.5% in a savings account, then this would be a step up.
However, if you are a seasoned investor, like my real estate developer mentor, then the minimum to find outside money to invest with you would be 8%.
Now you have the tools to determine if the deal is a good deal or not.
About Mey Duldulao
Back in 2011 I had over $30,000 in credit card and line of credit debt, was living paycheck to paycheck and was stressed out over my lack of success in my financial life.
In April of 2016, I became debt free and had a monthly passive income stream. I quit my job on December 23, 2016, and started doing my dream work of mentoring others on what I did to create the freedom to quit my job.
In 2017 we bought our first condo in Waikiki, and we went on 5 weeks of vacation (including a 7 day cruise to the Mexican Riviera)!!!
I spend most of my time doing what I dreamed of for years, spending my days with my son Jordan and my husband Jomel, enjoying motherhood and being a wife. I also enjoy researching Financial Freedom and sharing what I learn with my clients and on my blog.
If you want to learn more about how I can help take back control of your money and your time, then CLICK HERE, watch the free video and get started!