The return on investment (ROI) of real estate is one of the most important considerations when buying a property.
If I am buying it to rehab it and sell it, then here is how I do the calculations:
- Purchase price
- Rehab cost
- Duration and holding cost
- Value at the end as if that was in today’s market and how that would be compared to current, comparable sales
- Any trends in the market I should be aware of regarding price expected changes?
- If I will come out ahead, say within 12 to 18 months, and my ROI is at least 20% annualized, then I would want to proceed
- Then I discuss with various lender loan amounts and construction draw terms
If I am buying it to rehab it and keep it, then here is how I do the calculations:
- Purchase price
- Rehab cost
- Duration and holding cost
- Value at the end as if that was in today’s market and how that would be compared to current, comparable rents and cap rates
- Any trends in the market I should be aware of regarding rent and cap rates expected changes
- If I will come out ahead, say within 2 to 4 months, and my ROI is at least 10% annualized, then I would want to proceed
- Then, I discuss with various lenders the loan terms and figure out my cash-on-cash return which should then be around 12% per annum
There are some factors that affect the ROI in real estate:
Location: The location of your property will affect its value and its potential for profit. Properties located in highly desirable locations tend to have higher values than properties located in less popular areas. Properties near airports, shopping centers, or schools are also likely to be more profitable than those in rural areas.
Size: The size of your property will also affect its value and potential for profit. Larger properties tend to have higher values than smaller ones because they have more rooms to rent out or sell individually for higher prices per square foot.
Property type: Houses typically have lower returns than commercial properties because they require more maintenance and they have a smaller return on investment (ROI) than commercial buildings.
Condition: If your property needs repairs or renovations before it can be rented out, your return on investment may be affected.
Rent control laws: Rent control laws can affect both how much rent you can charge and how quickly properties are rented out.
General market trends:
So many investors are concerned about the macroeconomy and forget to zero in and focus on a specific area and a specific type of property to understand the values.
If you follow my formulas and above and you can come out ahead; you will understand values and will invest no matter the market because when interest rates are low, property prices are high, and when interest rates are high, property prices are lower so it is a numbers game and if you know the numbers and how to work with lenders and contractors, you will become super rich.
Join us on our mastermind calls that are better than any Podcast because you get to ask questions live and get expert answers with formulas based on practical applications that work in today’s market
Sincerely,
Cherif Medawar
