Return on Investment in Durango Real Estate
If you are looking at Durango real estate as an investment opportunity, return on investment is going to be very important for you. Return on investment, commonly abbreviated as ROI, is the benefit to an investor resulting from an investment of some resource, often used as a measure of profitability of a project or business. In real estate ROI can be determined in several different ways but the two most common way are the cost method and the out of pocket method. I’ll break these two methods down for you here.
The cost method is fairly straightforward and gives an easy to understand outlook on your investment properties. It’s simple to calculate ROI on an investment but it’s harder to find all the factors that you need to plug into the calculations. ROI is determined by taking your total gains from a property and subtracting the total costs and dividing it over the amount you invested times 100.
For example, you purchase a home for 100,000 that needs repairs, the repairs and renovations the home needs run $25,000 and the home then values for $140,000. The home you purchased now has an equity to you of $15,000, which you would divide by your total investment into the home of $125,000 (home cost + renovations) giving you a ROI of 12%.
Often there may be additional expenses that need to be factored in, such as monthly dues to HOAs, utility costs, taxes, etc. Determining all the potential costs that can affect your ROI will give you a much clearer picture of how well your investments are performing.
Out of Pocket Method
A popular method for real estate is known as the out of pocket method because it results in a much higher ROI. This method focuses on the amount of money that you directly invest through a down payment or other expenses in a property.
Take the same property from above, but financed with a $20,000 down payment instead of a cash purchase. It still needs the same repairs and renovations of $25,000, and your out of pocket expenses are now $45,000. The home is valued at $140,000 and your out of pocket ROI is 33.3%.
The method for determining the out of pocket ROI is a little different, you take the total gain ($140,000) subtract the total cost (home cost + repairs, $125,000) and divide it by the total amount invested by yourself ($45,000) so that works out to: ($140,000 – $125,000) / $45,000 * 100 = 33.3%. That is the amount of return on the money you paid out of pocket.
How long should I measure?
You can use ROI for a set duration such as an annual period, or for total time of the project. The amount of time you measure ROI for depends on the type of investment you are purchasing. The complete duration ROI measurement is perfect for buying homes and “flipping” them. You’ll want to use an annual ROI for properties you plan to lease out, as it will take much longer to get your initial investment out, but you’ll have a passive income source.
Investing in real estate is one of the most secure ways to ensure your financial wealth into retirement. Markets will always have their ups and downs, and with thorough planning and a local expert to guide you through the market you’ll never be more secure with your investments.
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