Calculating a Return on Investment for Real Estate
This calculation shows the return on a real estate investment.
The Cost Method
Let's say a property was bought for $100,000 and then the buyer spent $50,000 on maintenance. When it's sold it was valued at $200,000. So dividing by $50,000, the "equity position" of the buyer, by $150,000 gives an ROI of 33 percent.
The Out-of-Pocket Method
This is the preferred method by real estate professions as it can often produce a higher ROI
Let's say the same property was bought for $100,000 with a loan and $20,000 down payment. Then the buyer spent the same $50,000 on maintenance. When it's sold it was again valued at $200,000, so taking out the money the buyer spent gives us $130,000.
Take that and divide by the original $200,000 for the ROI, which is 65 percent.
Here, the loan amplifies the return, which is almost double the first example.