At a Real Estate investment network meeting, we were presented with a great simple worksheet on Real Estate investing and the ROI on this investment.
Referring to the example provided, if an individual purchased a home at a price of $240,000 and made a 25% down payment on the property (typically 20% is required) then a mortgage of $180,000 would be required. If you took a mortgage at 35 year amortization rate and we took an interest rate of 6% (current variable rate is approximately 2.25%) and you held the property for 10 years, your ROI is approximately 15% per year with a cumulative return of 172.5% over 10 years.
Further details are provided in the document below. Any questions or comments please send me an email.
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Vishal, I would recommend re-running these numbers and accounting for inflation. Typical conservaite allowance for inflation is 3% a year (interestingly, the same as your property growth percentage). If you’re only growing by inflation, then your ROI after inflation is actually 0% (yes, the power of leverage works both ways – if you’re off by 1% in your calculations with 30%, down, it has a roughly 5% effect on your numbers).
Also, your calculations should account for maintenance, utilities (if not included in rent), and of course vacancy – you won’t have your property rented out 100% of the time, or if you do, it shouldn’t be part of your calculations.
Leverage is powerful, but it’s powerful both ways.