I think you have to look at the final net in real estate and compare that to the return you are getting. That is after commissions, depreciation recapture, capital gains, etc
I'm trying to figure this out mathematically (not trying to hijack, but if we can get a formula I think it would help the OP).
Is the formula I've laid out below how you determine ROI? To keep it simple, I won't factor in depreciation. Depreciation would help, so it should be slightly better than the end result of this equation.
(Sale price)
- (closing costs)
- (mortgage payoff if needed)
- (capital gains)
- (money put in over time (down payment, mortgage, maintenance, management, taxes, etc))
+ (rents paid)
------------
= total return
Then
(Total return) / (money put in) = ROI over time
And
(ROI over time) / (# of years since purchase) = average annual ROI
So, for example: investor purchases a house in Jan 2010 for $200K and sells in Dec 2015 for $300K. 20% down payment. Monthly PITI averages $1200 over the course of the loan. House is rented for $1700/mo and management is $150/mo. Average maintenance & vacancy is $3000/yr.
So:
$300,000 (sale price)
- $18,000 (closing costs)
- $143,000 (mortgage payoff)
- $15,000 (capital gains)
- $136,000 (money put in over time (down payment, mortgage, maintenance, management, taxes, etc))
+ $102,000 (rents paid)
------------
= $90,000 (total return)
Then
$90,000 / $136,000 = .66 or 66%
(Total return) / (money put in) = (ROI over time)
And
.66 / 5 = .13 or 13% avg ROI
(ROI over time) / (# of years since purchase) = average annual ROI
Is that a good way to determine ROI? Other than depreciation, am I leaving anything out?
And before anybody questions a 50% appreciation in 5 years, I'll point out that based on where I live and the years I used this is not only doable but conservative. YMMV.
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