What is a Good ROI for an Investment Property: The Ideal ROI

It can be difficult to determine what passes as a successful return on investment or ROI, along with the source of profit losses in the ever-changing world of real estate investment. Real estate investment can only be successful if you have a clear goal in mind and know how to reach it. 

You might be thinking about what constitutes a good return on investment for investment property, or what ROI stands for when it comes to such properties. In this article, we will talk about what a good ROI is, along with how you can calculate the return on an investment property.

What Does ROI Refer to in Real Estate?

Anyone who wants to succeed in real estate investing must pay close attention to the return on investment or ROI of their properties, no matter how big or small their portfolio is. At its most basic level, a property’s ROI is simply its profitability. Knowing the probable ROI for a property is crucial for determining if purchasing it is a financially sensible investment. 

Those looking to determine the possible ROI of a property will naturally have a lot of components to think about, given the time and money invested in buying, selling, remodeling, and renting out a property. To determine profitability, you need to consider not only the type of investment you want to make but also the location and size of the property, as well as any financing alternatives used to make the purchase. 

Below, we have outlined the steps to determine the return on investment (ROI) for an investment property and what is considered a good ROI percentage to help you understand and make informed decisions about where to put your money. Once, you get to know the potential ROI for your property, you will also be able to take specific measures for optimizing ROI in investment properties so that you can get a better value for your investment. 

Methods for Calculating an Investment Property’s ROI

A lot of people who are interested in investing in real estate do it to rent out the space each year. Another common strategy is to purchase a property, make some improvements, and then sell it. 

When compared to rental properties, this sort of investment property has a somewhat different ROI calculation system due to the absence of yearly incomings or outgoings. Rather, the entire venture relies upon a single final sale that determines the profitability of the investment.

Here is the formula for this calculation-

ROI = 100%x(Estimated value of the property – Initial cost of investment):The initial cost of investment

If you want to know how much money you may expect to get back from a property that needs renovations, you need to know two things: how much the property was originally worth and how much you expect to spend on improvements. You will have a clear picture of the initial investment costs after you combine these figures. 

After this, you should calculate a rough estimate of the property's resale worth. Below, we've outlined the primary expenses to think about and provided some guidance on how to determine the approximate property worth to help you put these numbers together.

Initial Investment Cost

• The property’s cost

• All of the expenses incurred in the process of buying a house, including the fees of a solicitor

• A rough estimate of how much it would cost to improve the property so that the resale value of the property goes up

It should be noted that these estimates do not incorporate other factors like insurance premiums or taxes. These costs can vary from one project to another, so it's best to factor them in independently if you want an accurate picture of your property's possible return on investment.

Estimated Worth of the Property

• The property's average market value after renovations

• All expenses incurred in the process of selling a home, including fees charged by solicitors

The location, size, and other features of the property, along with the current housing market, all have an impact on the typical market value, making it difficult to even provide a rough estimate. However, using up-to-date home price data is one of the simplest methods to do so. 

What is a Good ROI for Property Investment?

Considering the larger initial expenditure required compared to many buy-to-let properties, particularly where the property is in a condition of disrepair, you must ensure a solid return on investment, or ROI, from the property you choose. Those who are brave enough to undertake such an investment stand a good chance of reaping substantial returns upon its eventual resale. 

It is quite difficult to arrive at a decision or opinion regarding what constitutes a “good” return on investment (ROI) for a renovated property, as the aforementioned calculations get highly affected by different variables like the property’s size and location, as well as the budget available for value-adding upgrades. So, in general, you should strive for an output of 5-7 percent, which is comparable to a buy-to-let property, with the possibility of even greater returns on the perfect property. 

Pay close attention to the original cost of a property, which is the main contributor to ROI, whether you're a developer or an individual thinking about selling your property. If you want to make a considerable profit, that's what we recommend. Minimizing initial expenses will allow you to maximize your earning potential in the long run. The most efficient method for doing so is to purchase at a discount during an auction rather than at full price.

Final Words

In reality, there is no definitive response to the question of what constitutes a satisfactory ROI for an investment property. Depending on the size and location of the property, along with the kind of investment, the return on investment could be higher or lower. You should consider the aforementioned factors while reselling a property and make sure that you are getting a decent return, which is around 5 to 7% in the case of investment properties.