The return on real estate investment works like the return on any other investment with the exception being that you may have to factor more items into the formula to be accurate. With your CD, you just look at the annual percentage yield and your interest earned for the year, and you’re finished. When dealing with real estate, other items like the cost of repairs may have to be considered.
The starting point is the amount of the investment made. This is not the purchase price of the property, but the amount that you threw on the table when you bought the property. Now, it gets a little tricky here. If you have improved the property over time, you must include those amounts in your investment amount. Should you have used the property for your residence, you should not count the amount of the payments because you received the benefit of a place to live in exchange for those.
When you sell the property, you can take the amount that you clear from the sale and compare it to the amount invested in the property. The difference between the two is your profit or loss. At this point, you may need to subtract other amounts from the remainder if you only bought this for an investment.
Taxes, insurance, interest and/or loan payments, and about anything else you would not have spent if you didn’t own the property need to be considered here. Again if it was your residence, you would have paid some of these items regardlessly just to have a place to live. But, let’s go back to the investment property idea. After subtracting the extra costs of owning the property until it sold, you are ready to calculate your percentage return.
Divide the money you have cleared by the total amount of the initial investment. The number you end up with will be your total percentage return. If you held the property more than a year, divide the new number by the number of years or fraction of years you held the property. This will give you an annualized return on your investment.
You can compare this number to the prevailing rates at banks and investment houses and see if your investment compares to a savings account. Obviously, if this number is less than the bank pays, you may want to reconsider the next time you feel the urge to be a real estate tycoon.