Here’s a quick-and-dirty overview of what ROI is and how to determine it.
When you’re considering any kind of real estate investment, one of the first things our team will ask you is, “What kind of return are you hoping to get?” We’re referring to return on investment, or ROI—a common term in the business world.
Here’s a simple way to think about this core concept: If you give me a dollar, how much do you want back? Do you want $1.05? Or just $1.01? What’s the number that will make you feel good about making from that investment? Sure, everyone would like to put in a dollar and get back $500, but that’s not realistic. Historically, the stock market provides an average return of 6%. Meanwhile, the principal of a real estate investment grows about 4% a year. Then there’s everything in between—high-risk investments that give you 20% returns, saving accounts, money markets in banks, etc.
“The basic rule of real estate investing: How much you put in determines how much you get out.”
For some simple math, let’s examine something that gives you a 1% ROI. That would mean that every year you’d get 1% of your investment back per year. If you give me a dollar, I’ll give you a penny back every single year. (We’re not going to deal with compound interest for now, just simple ROI). Of course, a 5% ROI would mean that you’d get a nickel back every year.
Now, when it comes to real estate ROI, there are several things you need to take into consideration. For one thing, are you going to pay cash for it? Let’s say you found a $100,000 home outside of Nashville; every year, you’d get at least $5,000 from that investment. If, on the other hand, you choose to finance your purchase with a loan and only put down 25%, then the numbers switch up. In that case, you’d be receiving 5% of $25,000 every year. How much you put in determines how much you get out.
In real estate, your annual return on investment is generated through your rents. You’ll have to look at the market to determine a fair rent price. Stay tuned; next time, we’ll explore all of the different ways to make money through real estate investing.
I hope that this overview was helpful. As always, reach out to me via phone or email if you have specific questions about ROI or real estate investing in general. I’d love to chat with you soon!