There are a lot of ways to figure ROI on investment properties, but most of them make it way more complicated than it needs to be.
Here is a simple method I use that helps me measure one investment against another and compare apples to apples rather than apples to oranges.
If you understand this method, it will make communicating with investors (who you hope will buy your properties), much easier.
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I’m going to explain how to figure the costs and returns on investment for cash flow properties.
Joe: A lot of people have been asking me about this. There are lots of analysis tools to figure out what the cap rate is of the rental property, how much return you’re going to get or what the long term investment value is. But I think you want to be able to compare apples to apples with your investments. So if, for example, I say, ‘I can go to Bank of America and put my money into a money market and get 2% return on that money, or I can go into a mutual fund and get x return. Or, I can buy this stock and I can get this return. So, I’ll have an idea of where we’re at in the continuum and how my investment in real estate compares to those.’
Joe: Investment in real estate almost always compares favorably over those types of investments. I think the reason most people buy mutual funds and stocks is because that’s how the people who sell those things make money. They won’t make money when they sell you investment property. They make money when they sell you stocks.
Joe: Stocks are the accepted way to buy property and to put your money. But I don’t believe that you have control over stocks. I don’t believe that you have any control over what happens in the boardrooms of these big corporations or whether they’re doing things legitimately, and if they are, whether or not they’re going to do the right thing or if they’re going to make money on it.
Joe: There’s no way you can know those things. And even the experts who look at these businesses and decide whether or not their values are there and even with all the stock analysis that they do, they’re still not going to have any control over that particular investment.
Joe: But with real estate, you can buy a piece of real estate, look at the market where that real estate is and determine whether or not you’re going to be able to have income and if it’s going to be sustainable over the long term.
Joe: That’s determined by rental values. Rental values can drop and you can still get a decent return on your properties if you’re doing it this way. You can also get professional management who can handle these things for you, and you can take them out of the transaction any time you want, so if you feel that they’re not doing a good job, you can pull them out and give somebody else the job to do it for you or you can take over and do it yourself, which is not something I would want to do.
Joe: There are lots of good property managers out there and if you find somebody with a license, then their ethics are accountable to the board of realtors and they’ have to follow through with doing it a certain way. So, if you do get a property manager, make sure you find somebody who’s licensed or who’s working directly under you on a day to day basis.
Joe: Anyway, how do you figure the return on investment for a property that you’re buying long term? And I think the easiest way to do return on investment is to, first, set aside the value of the property or the amount that you have into it. For example, let’s say you bought it and you fixed it up: add up the money you paid to buy it and the money you paid to turn on the utilities and to fix it up to get it habitable (and hopefully you have somebody to do all this work for you — don’t do work on properties yourself). Get the total cost.
To read the rest of the transcript and more of Joe Crump’s articles, click here: http://joecrumpblog.com/how-do-you-figure-the-return-on-investment-for-a-cash-flow-property/?utm_source=Youtube&utm_medium=EndLink+&utm_campaign=Youtube130722