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How to Calculate ROI Using the Simple Method
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This tool is a must-have for beginner real estate investors (and experienced investors too!). Furthermore, we’ll introduce an online tool that will help you make the ROI calculation faster and easier. In this guide, we’ll explain exactly how to calculate ROI on investment property using each method and formula. If you want to get the best understanding of a property’s potential rate of return, it’s recommended that you use all three methods. These are the simple ROI method, the cost method ( cap rate), and the out-of-pocket method ( cash on cash return). This is why there are three methods that property investors use to estimate ROI in real estate. These investors can’t use the same formula for calculating ROI because one can exclude financing expenses while the others can’t or he/she will get false results. For example, some might be able to buy rental properties fully with cash but others might prefer taking out a mortgage loan to finance the real estate investment. That’s because different investors have different criteria regarding how they’re planning to make the investment.
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However, the truth is, there are other formulas that you need to know for calculating ROI in real estate. Some will give you the general ROI formula and claim it calculates the return on any real estate investment property. Now you must be wondering: how to calculate ROI on rental property? This allows you to determine its efficiency as an investment compared to others in the real estate market and make smart decisions accordingly. Meaning, calculating ROI is the first step you need to do before deciding to buy a property to rent out. That’s simply because properties are not created equal and every real estate investor has his/her own idea of what a good return on investment is. But that doesn’t mean that just any rental property out there is bound to reward you with the profits that you’re hoping to achieve. Investing in rental properties continues to be one of the best ways to make money and grow wealth over time.