Whether you’re considering purchasing an investment property for the first time or you’re about to select your 10th investment property, you need to know your numbers. The value of any potential or current investment property is one of the most important calculations to comprehensively understand. Here’s what you need to know and why it matters.
What Is an Investment Property?
An investment property is real estate purchased for the main purpose of generating income. Most people generate this income by renting their properties out to others. This is done by earning more revenue in a month or year than you spend on the mortgage, fees, and upkeep of the property.
Calculating Your Return on Investment (ROI)
A great deal of any investment property’s value depends on the ROI it provides. Return on investment is a performance measure that evaluates the profitability of an investment property.
A low ROI signifies that you’re spending a great deal of time, effort, and money to make very little profit in return.
ROI= Net Benefits / Total Cost
For example, say you invest $50,000 into an investment property annually. The total revenue you make from your investment in a year equals $70,000. That totals a net revenue of $20,000.
$20,000/$50,000= 0.4= 40% return on investment. Most investors are happy with an ROI over 10%, so an ROI of 40% is excellent. It means that for every $1.00 you spend, you generate $1.40.
What Is Your Investment Property Worth?
The “Sales Comparison Approach” is the most common method used to determine the value of an investment property. Simply put, you compare similar homes that have sold or rented locally over a certain length of time. The comparison pools relevant characteristics such as number of bedrooms and bathrooms, square footage, property features, and other factors.
Evaluating the SCA of your investment property over a long period of time, such as 5 years or 10 years, often reveals emerging trends and meaningful patterns. However, the SCA approach does have its limits. While it can provide the baseline value of a home, it cannot provide a perfect, to-the-dollar prediction of value.
Get Advice from Real Estate Experts
Don’t jump into the wild world of investment properties alone. Douglas Realty Property Management has four decades of experience helping real estate owners make the most of their investments. Call (239) 542-6906 today to get the professional guidance you need to maximize the value of your investment property.