As a real estate investor, your main return on investment is equal to the cash flow generated by the property. This return is basically income in the form of monthly rent minus expenses, in addition to equity, which builds up. Expenses can include hiring a Property Management Franchise, maintenance, repairs and/or upgrades. Your rate of return, in the long run, will depend on certain variables, some of which tend to change from time to time. This is why property investors use real estate investment calculators to determine their actual return on investment by calculating and analyzing all the variables involved.
When evaluating the returns on your real estate investment, there are two main numbers you should focus on. The first number is obviously the cash flow in relation to the initial investment. For instance, if the property generates around $2,000 annually after expenses and taxes, and you acquired the property by spending $40,000, your cash-on-cash return every year based on calculations using a Real Estate Investment Calculator will be 5%. Hopefully, over time, your property’s resale value appreciates which means that you are building equity at the same time. This will then add to your overall return.
This combination of equity and cash flow is called the internal rate, return or total return. For example, if you acquire the property by spending $40,000, and the property generates $2,000 after expenses and taxes every year, and the value of the property increases by 2,000, then your total return for the year is $4,000. This equates to 10% of the total amount of money you paid to get the property. Generally, there is more to calculating ROI than this. This is especially the case when evaluating your property over a prolonged period. You will also have to factor in lease agreements; some people can save a lot of money by generating them using a Lease Generator. Some online lease generators can be just as good if not better than what you might get from a property management company.