Real Estate Investment Returns
As many people know, real estate is a great investment. This post will highlight how much profit can be multiplied in this field of investments. This means that if you are looking to make more money on your investment, it may be best to invest for a longer period of time and wait for your profits to grow.
So, you've decided to take the plunge and invest some of your hard-earned money in a real estate investment. Great! You'll be getting a high return on that investment if it is done right. There are many different types of investments in real estate, from single-family homes all the way up to multi-million dollar shopping malls. Your biggest concern when investing should be the return on your initial investment. Return on Investment (ROI) is the amount of profit earned divided by the amount of money initially invested. That's what we will focus on in this article: how much can I multiply my initial investment?
For most people, ROI is thought of as a percentage, but for our purposes of figuring out "how much," we will have to analyze the math. The formula for ROI is straightforward enough-ROI = (profit/investment) x 100%. If I own a piece of real estate that earns me $10,000 per year in profit and I bought it for $100,000, then my ROI would be 10% ($10k/$100k). That's great! Congratulations on your recent purchase. Unfortunately, that's not where the story ends.
See, the thing is that if you buy one bedroom apartment for $100K and sell it a year later for $120K, then your ROI would be 20%. That's great! But if you had bought the same property but held onto it for 5 years instead of 1 year before selling it, how much more could have been made? How about five times more-an ROI of 100%!Here are some simple numbers to explain why it can sometimes be worth holding onto an investment longer in order to get a higher return. Say you want to invest in real estate but don't currently have enough money saved up yet. You plan ahead and save up $50k, which you will use to purchase a rental home. You find a great house for sale that fits your needs and has the potential to make you around $8,000 per year. Awesome!
So, let's say you put down 20% of the purchase price, which is $20k.After signing all of the documents at closing, you now own the property. You will be getting rental income from this property, which you will have to pay expenses on (insurance, repairs, etc.) but let's ignore those for now since they are not profit. So, after one year, how much profit do you expect to make? Well, if we use our earlier formula, then profit = revenue – expenses, so profit = $8K-$7K, so profit = $1K.
You made a $1,000 profit on this investment!
Congratulations! You have to pay taxes on that though, so let's say you get an average return, which is give or take 20% for most people. Since you are making $1000 profit, your tax bill is going to be around 20% of $1000, or $200. So after paying the tax man his share, your net profit would be closer to about $800, which means ROI = 800/20k*.2=4%. 4% isn't bad at all, but what if you held onto it for another year? And another?
As time goes by, the value of the property will eventually increase with inflation and most likely with the amount of time that has passed. As years go by, the property will gain more value because inflation happens all of the time in the places around us where we work and live. That means that you won't have to pay as much out of your own pocket for all of those repairs or insurance that are needed on a yearly basis. This is especially true if you buy a fixer-upper, but even if you don't, it's still helpful to see your property value increase and thus not be required to spend as much money on repairs.
As we can see from this example, it pays off in the long run to hold onto property longer than just one year before selling it so that we get a bigger return on our investment due to the compounding nature of real estate.
Thank you for taking the time to read this article! The next step is to do your own research and apply these concepts in order to make yourself even more financially savvy when it comes to making future investment decisions. I hope that this has been helpful for you!