As a commercial real estate investor, your top priority is to turn a profit. So, it is no surprise that after capitalizing on a new investment property, your first question is about your return on investment (ROI). Although you cannot accurately predict the future in any type of business scenario, Investopedia.com provides a very simple and basic formula to calculate ROI on an investment property.
Continue reading to learn how to use this formula to determine commercial real estate return on investment, and who to call for Indiana commercial construction and general contracting services you can trust.
Calculating Investment Property ROI
According to Investopedia.com, you can find your return on investment by using this uncomplicated formula:
ROI = (INVESTMENT PROFIT – INVESTMENT COST)/INVESTMENT COST
Return on investment = investment profit minus investment costs, divided by investment cost.
Keep in mind that this calculation is not as straightforward as it appears. There are several other variables involved that ultimately generate these numbers, such as interest borrowed, financing details, facility maintenance, renovations, repairs, and similar expenditures. Investopedia.com maintains that in most cases, lower investment costs tend to render higher ROI’s, however, financing terms can also play a role in improving one’s return on investment. For this reason, it is vital that you do your due diligence as a commercial proprietor or real estate developer and find the best possible interest rates.
ROI Calculation Approaches
There are two best practices for calculating ROI. The first approach is referred to as the cost method. The second approach is referred to the out-of-pocket method.
► COST METHOD – Using this method, you would divide your equity by the total investment cost, including procurement, renovations, and maintenance. For instance, if you purchase a property for $200,000, then spend an additional $100,000 on renovations, and as a result your investment properties value increases to $400,000, your equity position as an investor would be $100,000.
400,000 – (200,000 + 100,000) = $100,000
ROI would be .33%, which you get by dividing $100,000 by $300,000.
► OUT-OF-POCKET METHOD – Most real estate developers use the out-of-pocket method to calculate ROI. If you use a loan to pay for the down payment of your investment property, it can render higher return on investment results under this cost approach. Using the same example as above, here is how ROI would look with a $40,000 out-of-pocket loan for a down payment:
$40,000 Loan + $100,000 Renovation = $140,000
$400,000 – $140,000 = $260,000 Investor Equity
ROI would be .65%, which is more than double the cost method.
As a commercial real estate developer or proprietor, you will mainly focus on the internal rate of return (IRR) for your property, which is basically your property’s cash flow and equity put together. Talk to in Indianapolis Indiana commercial general contractor for personalized advice on how to get the highest return on investment through strategic design build and commercial renovations.
Are you ready to speak with a specialized Indiana commercial contracting company about increasing your property’s value? Contact BAF Corporation at 317-253-0531 for trusted commercial construction remodeling in Indianapolis Indiana.
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