A pocket guide to calculating the ROI of an investment property

Tanya Vincent October 25, 2023


A pocket guide to calculating the ROI of an investment property

We’ll be the first to say that investing in property in California is a smart move. Our previous blog even touches on why the Bay Area specifically is still a lucrative real estate market, despite fluctuating interest rates. 

But if you’re new to the world of investing, you may be scratching your head a little about the right way to invest. What is the price range that fits your lifestyle? What factors do you have to consider? What’s the best way to pay for the investment? Most importantly, how do you maximize your investment? And many more valid questions…

Firstly, let’s outline a few things you have to consider at a high level before choosing an investment property.

Take an inventory – what is your spending power? Property prices in the Bay Area can be really high so you want to gather some information about neighborhoods or particular areas that are suitable to what you can afford. This is also the time to forward-think – is this a property you plan to live in (or leave empty) as it gathers value, or will you rent it out? If you plan to rent it out as soon as you buy it, consider prices other similar properties are charging for rent and how this would compare to your final monthly payment (mortgage, interest rate, property tax, and insurance). Receiving rent could either cover part, all, or more of your monthly payment. Naturally, if you don’t plan to rent the property, you have to weigh out paying for it on your own as well as any maintenance costs associated. 

Now you can determine if this property will be a lucrative investment in the long run. Here’s a simple calculation you can use:

ROI = (Net Annual Income / Total Investment Cost) x 100

Let’s break this down. Your net annual income is the amount of money you make from the property after you subtract all the annual expenses – so, yearly rental income minus property taxes, insurance, maintenance, property management fees, and other operating expenses. Your total investment cost includes the entirety of your payment for the property – purchase price, closing costs, and any renovation or improvement expenses before the renters move in.

As an example, if your property generates a net annual income of $40,000 and your total investment cost is $600,000, the ROI would be:

ROI = ($40,000 / $600,000) x 100 = 6.7%

This means for every dollar you invest, you earn a 6.7% return annually. To get more granular with your calculation, you can use this ROI calculator to make sure all of your expenses are accounted for.

This handy formula can give you a general idea of how your investment is performing, with a higher ROI indicating a higher profit. But it is just an estimate – be sure to consider other factors like property appreciation and your own long-term financial goals. 

Now that you know how to plug-and-play this formula, you can apply it to many different properties and compare the results to make a smart investment decision. Although it is not an exact science and external, unexpected factors may affect the bottom line, it gives you some certainty about where best to spend your time and money.

If you’re considering making a move on an investment, our team at Sapphire Realty has plenty of experience specific to the Bay Area and we’d be happy to assist you in your decision. Contact us here to set up some time!

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