As a property investor, you want to know as best as you can if the property you’re investing in is worth the investment. In other words, you desire to get a decent return on the investment.
Both beginner-level investors and more experienced investors wonder if an investment will be worth their time and effort. Rest assured, however, that the more seasoned you become, the better you’ll get at assessing properties.
When you’re assessing expected ROI, consider the following ways you can get a return on investment:
► Appreciation and Cash Flow
What is appreciation?
Appreciation is the increase in the value of the home from the time you purchased it until the time you sell it. It’s the value the home increases over time. Usually, that number will depend on things like any home improvements or the local real estate market.
What is cash flow?
Cash flow is the income that you regularly receive on the home that you purchased. This number will be based on various things, like the expenses of the investment and how much rent you’re getting.
Return on Investment (ROI)
For example, let’s say you purchase an investment property for $150,000. You hold that home for five years, receiving $300 cash flow each month. Then, you want to sell the house, and it sells for $175,000. This means the home has appreciated $25,000 during that five-year span. So, if you add up your cash flow for five years, or 60 months, you get $18,000 over five years. The appreciation of $25,000 you get all at once. I’d say that kind of deal is a great deal.
Now, to assess if a property is right for you, you’ll want to learn how to calculate estimated cash flow and appreciation. Cash flow you can determine by subtracting total expenses from the income. Be sure to include all the expense and avoid underestimating them. Be sure you do your research when it comes to all the costs you may incur when purchasing a property.
Appreciation is a slightly more challenging to predict, as you never know what the market might do year-to-year. Still, there are basic averages based on history you can use for your calculations. Or, you can use the current inflation rate as a base percentage, as historically, home appreciation tends to be at least the rate of inflation.
There are other models of investing too, such as wholesaling, lease options, ‘Subject To,’ and so on. You may want to stick with a particular niche before obtaining a more diverse portfolio. In our Foreclosure Investing Mastery Course, you can discover exactly which niche you should consider and the strategies to apply in different situations to maximize your profits. But no matter what you do, take time to assess what type of property investing may be right for you. Crunch the numbers as accurately as you can and continue to research and learn along the way.
Determine your exit strategy before you make your final decision, as that can be a factor. Your financial goals and lifestyle may be factors too, as to what kind of return will be right for you. You may want that monthly cash flow long-term, or you might want to sell after a few years for that appreciation. It’s really up to what it is you desire.