Sunday, May 20, 2012

Calculating ROI

Some buyers/investors may think ROI is too basic a topic and not worth mentioning but for those new to real estate investing understanding ROI and how to calculate it is very important in determining if a property is a sound investment. When purchasing a rent and hold property, the rule of thumb in calculating the ROI is to look at the average income over a 2-3 year period. What is a good ROI on a real estate investment? Well that is a personal question and in a large part has to do with the opportunity cost of that investment for an individual investor. In other words "what else could you do with your money?" Considering that you would probably be lucky to get 1% on your money in a savings account or possibly 2% on a CD it does not take much to consider other alternatives. Lets look at a typical ROI calculation for an Arizona residential property. We want to give you a basic and easy formula to follow which can help considerably when purchasing a property to formulate a return on investment.

Ok here's the scenario:

Home purchase price = $95,000

Annual operating expenses = $5030

(Including: vacancies, Hoa, management fees, property taxes, and repairs/maintenance)

Estimated Rental income = $16,800 ($1,400 monthly)

When you subtract the operating expenses ($5030) from the annual rental income ($16,800) you get a net annual income of $11,770

As a formulation:

$11,770/$95,000 = 12% ROI

This property is a typical example of a property in the current Arizona market place.

Another key factor that can and should be used in determining the ROI is the potential equity that may be earned on the property. In the long run equity is just as important as the cash flow a property is generating on a monthly basis. If you were to add a modest 5% annual appreciation to the above example your total return on investment would be close to 17%. Of course the length of time you hold the property and the closing costs to sell the property would need to be factored in but where else can you expect these kinds of returns now?

Property values in Arizona are still low, but are now rebounding upward nicely. Arizona was number 3 in foreclosures six months ago but is now ranked 33 in the nation. Big Change! This tells us that bank inventory is not still flooding the market, and values are rising. SMART has all the rental and property value data needed to calculate ROI within our state of the art system.

Our SMART investors are currently taking advantage of our auction properties and reaping the cash rewards. There are 200 to 300 properties scheduled for auction each day in just the Phoenix area. we have the inventory available and the knowledge needed to assist buyers in buying very nice homes at great prices. When purchasing investment properties, it is important to get upstream and away from the competition! Let us show you how to buy before the property is foreclosed on and goes back to the bank. The time is now to sign up and start making a great return on Arizona real estate! Cash flow is easy in this market! We can show you how.


Luke Gross


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