Determine the Return on Investment on a Real Estate Rental Investment

There are probably several ways to determine the Return on Investment on a Rental Investment but here is the way I do it and so far has been pretty close.

Initial Investment on the Rental property:

First, you will have to determine the initial cost for buying the property. Here is a breakdown of the normal initial cost you will incur. I will use $100,000 as the price of the property as an example.

Down Payment – 20% of $100,000 – $20,000

Loan Amount – 80% of $100,000 – $80,000

Closing Cost – For a $100,000 property, you are looking at about $4000

Repairs to get it ready for rent – $2000

Total initial investment – $20,000 + $4000 + $2000 = $26,000

Your return on investment will be calculated on this $26,000!

Monthly Expenses on the Rental property:

Mortgage payment @ 5.5% fixed 30 year loan – $454.23

Home Owners Association dues – $200 (More if you live in California)

Home Owners Insurance – $0 (If you buy a Condo, the HOA normally pays this)

Condo Insurance – $20 (This is to protect you from any leaks etc)

Home Warranty – $35

Property Tax – Assuming 1.25% – $104

Estimated Monthly Maintenance – $50

Your total monthly expenses will run around $925!

Rental Income:

Assume the property rents out for $1200

Cash Flow and ROI:

Yearly Gross Full rent – $1200 * 12 = $14,400

Net Monthly profit – $1200 – $925 = $275

Yearly Net profit – $275 * 12 = $3300

Vacancy rate 8% (1 month rent) – $1200

Yearly net profit after vacancy – $3300 – $1200 = $2100

Return on investment – $2100 on a $26000 initial investment = 8.07%

I actually have an excel spreadsheet template that I use. Please email me if you would like a copy and I will be more than happy to email it to you. My email address can be found in our Contact us page.