High return on investment (ROI) is the ultimate goal of any real estate investment, whether it is a residential property, a commercial unit, or a vacation rental. It indicates the amount of money you earn after deducting associated costs. Calculating ROI is important as it helps you understand the earning potential of your properties and compare the profitability of your multiple investments.
A good ROI on rental properties in Phoenix is usually above 10%, but it may vary between 5% and 10%.
While calculating the return on your investment, you need to gather property details, mortgage details, monthly and annual rental expenses, and rental income details. Once you collect all the information, you can calculate the ROI of your asset with the method that suits you best.
Different Ways Of Calculating ROI On Your Phoenix Property Investments
Here are a few methods to calculate the return on your Phoenix investment property.
Calculating the ROI with a formula
Using the ROI formula is one of the most popular ways to calculate the ROI of your Phoenix rental property. Here, you take total gain and subtract the investment cost:
ROI = Total Gain - Cost of Investment / Cost of Investment
For example, if your total gain is $40,000 and the cost of investment is $30,000, the ROI according to the formula is:
$40,000 - $30,000 / $30,000 = 0.3333 = 33.33 %
The equation sounds simple, but you have to consider variables such as maintenance, repair costs, and the leverage that you borrowed while investing. These factors affect your ROI.
Using the Cost Method to Calculate ROI of Your Phoenix Asset
Investors use the cost method when they purchase the property totally with cash. In this method, investors don’t need to consider monthly mortgage installments. Here, you have to divide equity by all the costs, including repair costs, closing cost, and property rehabilitation.
For example, if you buy a property for $100,000, and spend $20,000 for renovation, 10k for closing costs, then $130,000 is your total cost.
If you sell the property for $160,000, your total gain is 30K. 30K total gain divided by 130K total cost is 23% ROI on your initial investment. This is a decent ROI.
The Out-of-Pocket Method for Calculating ROI on Phoenix Property
The out-of-pocket method derives the figure based on how much money you spend out of pocket. Investors follow this method when they purchase the property with a loan and down payment.
You would need to take the purchase price, closing costs, renovation costs, the mortgage payment you need to make during the time period you hold the property, any additional maintenance you may have during this time frame, etc., all expenses incurred during the entire transaction from purchase to sale.
Using ROI Calculators
ROI calculators enable you to track your mortgage rates and return on investment to demonstrate the value of your property. It is a metric that helps investors gauge the profit of their investments. It simplifies the calculation process of using formulas, mathematical equations, or other traditional methods.
These calculators consist of a formula box, where you may enter the initially invested amount, total earning, and the investment period. The calculator shows you the ROI from your investment along with an annualized return and compounded annual growth rate.
All these methods can ease the process of calculating returns on your Phoenix property investments. However, if you are looking for a step-by-step guide to calculate ROI on property investments or want to get it done by a professional, Service Star Realty is here to assist you.
At Service Star Realty, we analyze all the details of your property investments and provide you with accurate ROI calculations.
Contact us for a more detailed, property-specific ROI calculation.
Service Star Realty
2929 East Camelback Road #119, Phoenix, AZ 85016