If you think you’re ready to purchase a real estate investment property, you want to do an ROI analysis before you move forward. ROI, which stands for return on investment, is a simple calculation. It’s the monthly net profit divided by your monthly expenses. That number is multiplied by 100 to reflect the return on investment as a percentage:
(Net Profit / Cost of Investment ) X 100 = ROI
Mistake #1: Using Estimates Instead of Actual Numbers
Your ROI calculation should be based on actual numbers because estimations can be hugely misleading. Again, these estimations are good only as guidelines when looking at a potential income property. But when doing an ROI analysis, always use actual numbers to make an educated investment decision.
Many times, real estate investors forget to include some important expenses when they’re calculating their ROI. Some commonly forgotten about expenses include vacancies, property taxes, insurance, repairs, capital expenditures and management fees. If you forget to include all expenses, then your math and ROI will not be correct.
Mistake #3: Not Knowing what a Good ROI is: