Let’s discuss the importance of supporting your Real Estate Investment decisions with the numbers.
In a practical world, it is not possible to just go ahead and invest in real estate just because it looks decent and is located in a great location. Some numbers, financials, and statistics will be required to make sure that the investment will yield high returns in the future, and these numbers will help you in identifying the risks attached to the investment as well as the chances of profitability. One of the common calculations that real estate investors do is related to the return on investment, and it is basically a figure that states the profit one should make on such investment. Before beginning with the calculation, it is important to come up with all the required data that is necessary. Some of the figures that you might require will be the payments that will have to be made to the tenants, the costs that are related to the property such as insurance and taxes, and the total investment that you are putting into the property.
The first part of this calculation is to come up with the gain that you will make on the property on a yearly basis. This gain will definitely be an exact figure. If you do not know how to come up with this figure, just think about how you will use this property. If you are going to give it on rent, the gain will be the amount that you will receive in rent. If you just want to sell this property later on, you will have to do some calculations regarding appreciation of the value.
The expenses will be related to the real estate, and these expenses will be both direct and indirect. Some of the direct expenses related to real estate are taxes and insurance. On the other hand, you will also have to include maintenance expenses, or any other sort of expense that will have to be incurred to regulate and maintain the property.
The return that you will get is what is called return on investment. You will reach this figure by dividing the difference between gain and expenses by the cost you incurred to purchase the property. It will be represented in terms of percentage and will allow you to evaluate alternatives as well. For instance, if a bank is offering a better percentage return on deposit accounts than the ROI calculated from real estate, you will know where to invest.
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