How to Calculate the Return on an Investment Property – Peachtree City Property Management

Cindy Rampley - Tuesday, January 19, 2016


Achieving an excellent rate of return on your real estate investment is predicated on buying property in the right location for the right price. We get a lot of questions about the rate of return you should expect, and we have a specific calculation we use to look at what you’re gaining.

Measuring Income and Expenses

Begin with the gross income produced by the property on an annual basis, which is of course the 12 months of rent. That’s all the income a single family home will produce. Then deduct all the annual expenses, including the property taxes, insurance, homeowners association fees, management fees and variables like vacancies and maintenance. Estimate the vacancy and maintenance figures based on the property’s condition and the market. Sometimes, it can be between 10 and 15 percent of the income.

Example of Determining Return

So, consider you bought a property for $170,000, and the inspections and closing costs added some expenses, so you have a total investment of $172,000. This house will rent for about $1,400 a month, which is $16,800 a year. You can estimate the fixed expenses to be about $4,300. The maintenance and vacancy costs could be 10 percent in a good year. The net cash flow is the money you keep in your pocket, which is the gross income minus expenses. In this example, the net income is between $9,800 and $12,400. This is the number you compare to your total investment of $172,000 to come up with your rate of return. If your $172,000 was in another investment like a money market account, your interest rate would be your cash flow. So even using a 15 percent vacancy and maintenance factor, the rate of return can be calculated at 5-1/2 percent. About half of our tenants renew for another year and some stay three or four years. When your vacancy rate is lower, your rate of return is higher and this would be at about 7 percent.

Value Appreciation

The value of the house, $170,000, will continue to increase 4 to 5 percent a year. When you add growth and value to your annual cash flow, your long term return will be much higher than that.

Please contact us at Tri-City Realty Services with any questions you have on this topic. We look forward to helping you with your investment goals.