Return on Investment Rate
The return on investment (ROI) rate represents the expected return after one year as if you had purchased the property in cash. Understanding the ROI rate is crucial for the growth of your future business, especially if you are just starting.
Calculating Property Value
First, determine the net operating income (NOI) of the property in question. The NOI for a rental property is the net rents after deducting expenses. Determine the net rental income after maintenance costs if the property is an apartment complex.
Example of Calculation
A six-unit apartment project might yield a net profit of $30,000 from rents. Determine the rate of return by comparing it to a recently sold similar property. Then divide the net operating income by the rate of return to find the current value.
Assuming the similar property sold for $250,000. You determined that the NOI for the property after deducting applicable expenses is $50,000. Divide that by the sale price of $250,000. You will get a return rate of 0.2 or 20%.
Assuming a return rate of 20%, the current value would be $150,000.
Other Tools
Remember that this is not the only way to calculate the value of rental properties – it is just one tool in the toolbox. Various estimates and financial calculations used by investors and real estate professionals in their daily routines have some value.
For example, properties are rarely purchased outright and without financing, so there may be another calculation method, such as cash-on-cash return.
There are many complex calculations you can use to evaluate properties and determine the performance of real estate investments and managing rental properties. Some apply to retail, some to fix-and-flip projects, while others apply to rental investment. Some are more useful for the rental investor in determining the long-term performance of their portfolios.
Commercial Real Estate Investment
There is an entirely new level of math involved with commercial investment. Lenders use some very specialized calculations to determine whether they will finance purchases or projects.
The choice of financial calculations and profitability metrics you will use depends on your goals and the type of property. You may not be very interested in the rate of return and other related metrics if you are an investor buying single rental properties.
Rental Property Investment
The start of a successful rental real estate investment strategy is an accurate estimate of the potential rental return of the property in question. The net rental yield tells you how successful your investment is, not only with the market factors and the inherent rent but also with your costs, including management and maintenance.
Conclusion
Those who invest in real estate through income-generating properties should have a method for determining the value of any property they are considering purchasing. Return on investment rates are widely used in evaluating commercial and multi-family properties and profitability studies. They can be used to determine a good sale price or the value of a listed property versus the asking price.
Source: https://www.thebalancemoney.com/calculating-property-value-with-capitalization-rate-2866800
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