Every real estate investor is looking for one and the same thing – profit.Makingmoney is the main – if not the sole – purpose of the real estate investing business. And in real estate, you make money by getting good return on your investment. Then comes the question – What is a good return on real estate investment? For real estate investors, using an ROI calculator can be one way to find out if they will be successful in their venture.
As with many other crucially important questions in this field, such a question has no straightforward answer. The easiest – and arguably most accurate way – to answer the question “What is a good return on real estate investment?” is “It depends.” But this is really useless for a serious investor, right? Then let’s look at some of the possible answers to this question.
How Do You Measure Return on Real Estate Investment?
Another major question in real estate investing with no single, clear answer is: What is return on real estate investment? Basically, similar to any other type of investment, here you are trying to measure how much money you will be making from your income property, factoring in the size of your initial investment and any other one-time or recurrent costs. Measuring profitability in real estate is different from measuring profitability in stock investments, let’s say, because of the different nature of the two businesses. There are 3 most widely used methods for calculating return in the world of real estate investments.
Related: How to Value an Investment Property
3 Ways to Measure Return on Real Estate Investment
Measuring the return on real estate investment can be done using the following metrics:
1. Return on Investment (ROI)
Many investors and other real estate experts would argue that ROI is the single most important number when it comes to return on real estate investment. The ROI is a measure which is used to evaluate the efficiency, or profitability, of an investment. It gauges the amount of return on a certain investment (i.e., the rental income in case of real estate) relative to the investment’s cost.
Formula:
ROI = Annual Rental Income/Total Cash Investment
But things are always easier when you look at an example, so let’s do that.
Example:
You buy an investment property for $400,000 and pay another $15,000 in closing fees, rehab costs, etc. Then you charge a monthly rent of $2,500. What is the ROI for this income property?
ROI = 12 x $2,500/($400,000 + $15,000) = 7.2%
So, we come back to the question: What is a good return on real estate investment in terms of ROI?
Different investors and experts will give you different answers. It depends on the size of the investment property, the location, and the risk associated with this investment as well as the principles of each investor. While some investors will be perfectly happy with a 6% ROI on a safe investment property, others would not go for anything less than 40%, on a riskier property, of course. On average, anything above 15% of ROI is a good return on real estate investment.
2. Capitalization Rate
The capitalization rate, or the cap rate for short, is another widely popular metric for measuring return on real estate investment. The cap rate is the rate of return on an income property based on the net operating income (NOI). One huge advantage of the cap rate over other profitability indicators that it shows the rate of return regards of the method of financing.
Formula:
Cap rate = NOI/Price
Once again, it’s best to look at a specific example.
Example:
You buy an income property for a total of $500,000 and rent it out for $3,200 per month. In addition, the annual costs related to managing your property amount to $6,000.
Cap rate = (12 x $3,200 – $6,000)/$500,000 = 6.5%
Now the question of “What is a good return on real estate investment?” becomes “What’s a good cap rate for investment properties?” Once again, it is hard to judge as it all depends on the asset type, the property size, the market, and others. But there is a general agreement among investors that good cap rate means anything above 8% and especially above 10%.
Related: What’s a Good Cap Rate for Investment Properties?
Once you’ve figured out what is a good return on real estate investment in terms of cap rate, you can use Mashvisor’s investment property calculator, which will provide you with the cap rate for thousands of properties available throughout the US in addition to the cap rate for entire neighborhoods in the hottest US real estate markets.
3. Cash on Cash Return
A third widely used metric for determining the profitability of a real estate investment is the cash on cash return, or the CoC return. Unlike the cap rate, the CoC return varies with the method of financing, as you will see in the formula in a bit. The CoC return measures the annual return on your investment based on the NOI and the total cash investment.
Formula:
CoC return = NOI/Total Cash Investment
To make things simpler, let’s have an example.
Example:
You purchase a rental property worth $350,000 through a mortgage, with a down payment (cash payment) of 20%, or $70,000. You are able to charge your tenants $1,800 per month, and your annual expenses associated with the property add up to $4,000.
CoC return = (12 x $1,800 – $4,000)/$70,000 = 25.1%
However, let’s look at the same property which you buy fully in cash.
CoC return = (12 x $1,800 – $4,000)/$350,000 = 5.0%
As you see, the CoC return changes drastically if you switch to a different financing method.
To know what is a good return on real estate investment now we need to know what’s a good cash on cash return for investment properties. Similar to the cap rate, a good CoC return is anything above 8%, but it is better to aim for over 10% or 12%.
Now that you know what is a good return on real estate investment with regards to CoC return, you can decide which property is the right for you based on the data computed by Mashvisor’s rental property calculator for numerous properties across the US, divided by traditional and Airbnb rental strategy.
How Can You Find a Good Return on Real Estate Investment?
Real estate investing can be a rewarding venture, if done correctly. Along the way, you will learn a lot about diversifying your investment portfolio and securing another source of income. It will also help you expand your knowledge on managing real estate properties for investment. The key is to identify a suitable investment property. How? You can use an ROI calculator.
What Is a Real Estate ROI Calculator?
The real estate investment calculator will help you assess the current real estate market so you can make an informed decision. As with anything related to real estate, you need to find the right location and implement the best rental strategy. With an ROI calculator, you can be sure that you’re buying a good investment property. The digital tool is also called rental ROI calculator, Airbnb ROI calculator, or investment ROI calculator. Whatever term you use, its goal is to help you analyze properties and locations that will be profitable for you, making it an essential tool for real estate investors.
Where Can You Find the Best ROI Calculator in Real Estate?
So, where can you find the best real estate ROI calculator to help you identify good investment properties? A quick search online will bring you a long list of ROI calculators. There are so many to choose from but if you are looking for the best one in the market, look no further.
Take a look at Mashvisor’s real estate investment calculator. Mashvisor’s tool can help you identify the locations of potentially profitable investment properties in the United States. It enables you to search and evaluate different neighborhoods and real estate investment properties. Just enter the relevant details based on your real estate investing criteria and let Mashvisor’s ROI calculator do the work for you.
An ROI calculator can be a helpful tool for both beginner and seasoned investors.
How Does Mashvisor’s Real Estate Investment Calculator Work?
Mashvisor provides a reliable real estate investment calculator to help you find lucrative properties and reach your financial goals. Let’s see how you can best take advantage of them.
Neighborhood Analysis
Location plays a key role in real estate investing. It would help if you find the best-performing markets. Mashvisor’s ROI calculator can be helpful in this aspect. It enables you to look for locations in a specific city or go deeper into the top-performing markets. In just a few clicks, you can get a comprehensive neighborhood analysis as Mashvisor makes it easy to locate the best areas depending on your funds and investment strategy.
Investment Property Analysis
Mashvisor’s ROI calculator not only helps you find the right location for real estate. It also helps you to evaluate the right property that you can buy. Of course, this calls for a thorough analysis so you can be sure that what you’re buying will be profitable for you. With Mashvisor’s ROI calculator, you can limit your search to properties that meet your criteria and gain insights into several relevant investment property data. The data includes rental expenses, rental income, cash flow, cash on cash return, cap rate, real estate comparisons, optimal rental strategy, occupancy rate, and return on investment.
Overall, Mashvisor’s ROI calculator is an excellent tool that enables you to assess properties in your preferred location without spending too much time, money, and effort calling various agents and scouring different cities and states. Whether you are a beginner or a seasoned real estate investor, you will find this investment ROI calculator a helpful tool to find a good return on real estate investment.
As mentioned a couple of times above, what is a good return on real estate investment depends on the characteristics of the actual property and the local market. For instance, you should expect a higher return from a large, luxurious income property because it is riskier – it might take months to find tenants due to the higher monthly rent. Similarly, you should aim for higher returns in less secure neighborhoods, which might attract tenants more likely to damage your income property or not pay rent regularly. So, while it is all subjective, above are some general guidelines about the minimum ROI, cap rate, and CoC return you should expect from a rental property before you decide to buy it. Together, these numbers give you an answer to the question “What is a good return on real estate investment?”
After that, you may ask, “How can you find a good return on real estate investment?” You need a reliable ROI calculator for that. And that’s where Mashvisor comes in. It offers a real estate investment calculator that can help you find profitable investment properties in the US.
Conclusion
Bear in mind that when it comes to real estate, it’s location, location, location. That’s why it’s important to use an ROI calculator in real estate that will assist you in finding properties in the best possible locations. With the ROI real estate calculator, you can analyze both investment properties and neighborhoods to find profitable investment properties.
To learn more about Mashvisor’s ROI calculator and its other useful tools, sign up for a free 7-day trial, followed by a 15% discount on your quarterly or annual subscription.
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As an enthusiast and expert in real estate investing, I bring a wealth of knowledge and experience to help you navigate the complex world of property investment. I have a deep understanding of the key concepts and metrics that drive success in real estate, and my expertise is grounded in practical applications and real-world scenarios.
Now, let's delve into the key concepts discussed in the article:
1. Return on Investment (ROI):
- Definition: ROI is a crucial metric in real estate investment, measuring the efficiency or profitability of an investment. It compares the return from an investment (e.g., rental income) to the cost of the investment.
- Formula: ROI = Annual Rental Income / Total Cash Investment
- Example: If you buy a property for $400,000, incurring additional costs of $15,000, and generate a monthly rent of $2,500, the ROI would be calculated as 7.2%.
2. Capitalization Rate (Cap Rate):
- Definition: Cap rate is another vital metric, determining the rate of return on an income property based on the net operating income (NOI). It is advantageous as it considers the rate of return regardless of the financing method.
- Formula: Cap Rate = NOI / Price
- Example: If you purchase a property for $500,000, rent it out for $3,200 per month, and incur annual management costs of $6,000, the cap rate would be 6.5%.
3. Cash on Cash Return (CoC Return):
- Definition: CoC return measures the annual return on investment based on NOI and the total cash investment. It varies with the financing method used.
- Formula: CoC Return = NOI / Total Cash Investment
- Example: If you buy a property worth $350,000 with a mortgage, a down payment of $70,000, and generate a monthly rent of $1,800, the CoC return would be 25.1%.
4. Real Estate ROI Calculator:
- Purpose: An ROI calculator is a digital tool that assists investors in assessing the current real estate market, analyzing properties, and making informed investment decisions.
- Importance: It helps investors find suitable investment properties by considering factors like location, rental strategy, and financial goals.
5. Mashvisor’s Real Estate Investment Calculator:
- Features:
- Neighborhood Analysis: Helps identify top-performing markets based on specific criteria.
- Investment Property Analysis: Evaluates properties using various metrics like rental income, cash flow, and ROI.
- Benefits: Saves time, money, and effort by providing comprehensive property and neighborhood data.
6. Determining a Good Return:
- Subjectivity: The definition of a good return depends on factors like property size, location, risk, and individual investor principles.
- Guidelines: Generally, a good return on investment is considered to be above 15% for ROI, above 8% for Cap Rate, and above 10% or 12% for CoC Return.
7. Conclusion:
- Location Importance: Emphasizes the significance of location in real estate, reinforcing the adage "location, location, location."
- Mashvisor’s ROI Calculator: Recommended as a reliable tool for analyzing properties and finding profitable investment opportunities.
In conclusion, armed with this comprehensive understanding of key real estate investment concepts, investors can make informed decisions and maximize their chances of success in the dynamic world of real estate.
