What is a good return on real estate
What is a good return on real estate?
All investors (whether they invest in real estate or other forms of investment) strive for the same goal: they want to make profits and achieve a good return on their investment. This is also the case for investments in rental properties. However, one of the reasons newcomers in this field are losing money is that they are chasing unrealistic returns. This raises the question – what is a good return on real estate? Similar to other issues in the real estate industry, there is no clear answer to this question. Most often, this is due to a number of factors, including the location of the investment, the type of property, the conditions, the risks, etc. For a serious real estate investor, this information is not a satisfactory answer. Let’s look at some possible answers to the question of what a good return on investment in real estate is. The best way to look at this is to answer this by means of examples and figures.
What is a good return on real estate and how do you calculate it?
Before we give you the answer to the question “What is a good return on real estate”, we would like to explain to you how you can calculate the return. The yield calculation of real estate is a way to measure the performance of investment properties. Simply put, it is the profit that a real estate investor receives compared to the investment he has made. Based on this definition, the following example of calculating the return is as follows:
Suppose you bought an income property for 400,000 euros, paid another 50,000 euros for the ancillary costs and charged your tenants a monthly rent of 2,500 euros. To calculate the return on this investment property:
Yield = (12 x 2,500 euros) / (400,000 euros + 50,000 euros) x 100
= (30,000 euros / 450,000 euros ) x 100
= 6.66% return
If you calculate the return according to this formula, you have generated a numerical value, but no indication yet whether the return on the property is good or bad. After all, the word “good” is subjective when it comes to what a good return on real estate is, and different investors have different criteria by which they judge what they think is good. While you think 6.66% is a good return, another property investor with a riskier investment disagrees. Nevertheless, most experts agree that, on average, anything above 15% is a good return on real estate. But even this statement is limited, because property investors often use mortgages that have some kind of leverage to increase returns. This shows that if you were to finance an income property with a mortgage, you can expect a higher return than if you paid it in full in cash. Accordingly, when answering the question of what a good return on investment is for rental properties, investors must consider their method of financing. It is not true to say that a good return on a cash investment is also good for a mortgage-financed real estate investment.
If you are unsure about the calculation of the return, we will be happy to help you clarify and achieve a good return on your property at any time.
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