Real Estate Investing 101: Things to Know About Your Home’s ROI

Real Estate Investing 101: Things to Know About Your Home’s ROI

  • Summerville Partners
  • 08/1/22
As a homeowner, it’s beneficial to know about your home and its worth. Not just because it’s yours and you live there, vacation there, or rent it to someone else, but because if any problem arises in the future, you’ll be at an advantage. Knowing your home is also quite useful if you ever want to renovate it or sell it in the future.

For people who want to invest in real estate, knowing everything about a property is even more essential. One thing that will be a great benefit, in the long run, is learning everything there is to know about your home’s ROI.

What is ROI?

Return on investment (ROI) is a financial ratio that calculates the profitability of your investment. In terms of real estate, the ROI reveals the profit you can make if you were to sell your home.

The formula to calculate ROI is simple: subtract the investment gain by the investment cost to determine net profit, and then divide by the investment cost.

  • Net profit: Entity income minus cost of expenses

  • Investment gain: Profits made (or planning to make) from the sale of a real estate property

  • Investment cost: Initial cost of real estate property plus all additional expenses

ROI = (Investment Gain − Investment Cost = Net Profit) ÷ Investment Cost

In the case of ROI, the higher the percentage, the better: it means that your investment’s gains compare favorably to the cost of your investment, and indicates a lucrative investment.

For example, suppose a homeowner wants to sell their home for $300,000. They originally bought the property for $200,000 years ago, but similar properties in the area now sell for a much higher price. Additionally, this homeowner also spent an additional $40,000 on renovating the home. In this case, the ROI for this home is 25% using the following equation:

ROI = ($300,000 – $240,000 = $60,000) ÷ $240,000

Calculating the ROI on a rental property is a little bit different because there’s cash flow to consider as well as annual operating expenses that come with maintaining a rental property, such as property taxes, insurance, maintenance, and homeowners association (HOA) fees. Suppose a homeowner bought a luxury condominium for $400,000 and rents for $4,000 a month, producing an annual rental income of $48,000. However, the homeowner also has to account for $15,000 in additional expenses. After subtracting the expenses from the annual rental income, the homeowner’s annual return is $34,000. In this case, the ROI for this condominium is 8.19% using the following equation:

ROI = ($48,000 – $14,000 = $34,000) ÷ 415,000

For the most part, real estate experts consider homes with an ROI of at least 10% to be good investment properties. There is no definitive answer on a “correct” ROI percentage, but you should aim for at least 5% ROI for any real estate investment property.

Why is ROI useful?

For anyone who wishes to invest in real estate, but especially first-timers, there’s always the big question: how do you know if the property that you want will be a good investment? It’s a question that prevents many from rushing into investing in real estate.

People invest in real estate for the same reason: they want to increase their wealth in the long term and hope their chosen property increases in value over time. Because buying a home is such an important (and expensive!) purchase, it’s logical to want to be positively sure the investment will be worthwhile before closing a deal.

Investing in any field is all about making smart investment decisions. In real estate, calculating the ROI will help you achieve this goal — it’s the ultimate tool to evaluate whether or not you should invest in a property. Calculating the ROI of several homes that you’re interested in is also a great way to compare the properties and narrow down your options based on the properties that will bring you the most profit. If you already own a home and are planning to sell, calculating the ROI will tell you if you have made any profit on your real estate investment.

Increase your home’s ROI

Before selling, some homeowners choose to increase their home value by investing in ROI projects to price their homes higher. The goal is to transform your property to become a buyer’s dream home and attract several potential buyers. Sometimes, this consists of modifying your home in small ways, like moving furniture around and rearranging the space. Other times, it may be very worthwhile to pay for some updates, replacements, or small renovations to increase the property’s value. Less usual is fully renovating a section of your home. Below, find a list of the best ROI projects to increase the value of your home.

Minor updates 

Usually, there’s no need to undergo full upscale renovations  — it’s all in the details! Think about repainting some walls, replacing old fixtures, refinishing hardwood floors, and updating the lighting. These are small, but meaningful updates that go a long way in making your home seem and feel new.

Fix anything that needs it

Touring a home that needs repairs is just the way to put off buyers. To avoid that, repair or replace anything that’s damaged or broken.

Be sure to evaluate the following:

  • Doors
  • Roof
  • Walls
  • Ceiling
  • Windows
  • Appliances
  • Cabinets
  • Sinks and faucets
  • Bathrooms
  • Showers
  • Flooring
  • Heating, ventilation, and air conditioning system (HVAC)
  • Water heater
  • Smoke detectors
  • Electrical panel and circuit breakers
  • Drainage

Minor or major remodel

People usually avoid heavily renovating their homes before selling, and in terms of ROI, spending large amounts of money on renovations is counterproductive. But small remodels are much cheaper and can go a long way. In terms of the best part of a home for improvements, a kitchen is a popular option. It is considered by many to be the heart of a home, after all. Adding a granite kitchen island and/or replacing countertops, for example, is a great way to give your kitchen an upgrade without undergoing a full remodel. However, if you do feel like your kitchen needs a full remodel to really upscale the space, it can go a long way in elevating the value of your home.

If you’re thinking of selling, hiring a qualified real estate agent who is an expert in your specific real estate market is essential. They’re the best guide to all things selling your home, including ROI, and will provide the best advice and suggestions on how to maximize your investment.

Interested in North Shore & Chicago real estate?

Looking to buy or sell a property in the North Shore and Chicago area? Contact Summerville Partners today. Summerville Partners offers exceptional, first-class real estate service with over 30 years of experience and over half a billion dollars in sales. They’re happy to help!

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