How To Evaluate The Potential Of A Rental Real Estate Investment

A rental real estate investment can be a great way to build your personal wealth, and may be a good option for you, especially if you are uneasy about investing in the stock market, or just want to diversify your investment portfolio.

With a rental property, someone else pays your mortgage, and over time your equity grows. You can eventually own a physical piece of property outright that also produces income.

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Before you decide to invest in a rental property you should calculate the return on your investment to see if the deal is worth making. What return is reasonable to expect on your money? What do you need to earn in order for the investment to be worthwhile?

Like any investment, you need to understand the expected return on investment.  Return on investment or ROI measures how much money or profit is made on an investment as a percentage of the cost of the investment. ROI shows how effectively and efficiently investment dollars are being used to generate profits.

               ROI = (Net Profit/Cost of Investment) x 100

Calculating the ROI of a rental property can be complex. You must factor in all the costs associated with holding the property.

Initial cost of investment: Purchase price, closing costs, and renovations to get it ready to rent

Revenue:  Rental income, mortgage paid down,  and change in property value, or how much additional equity you have based on current housing and rental market prices.

Expenses: Principal and interest payments on your mortgage, homeowner association dues, property insurance, property taxes, vacancy cost (standard vacancy rate is 5-8%), cost of your time, maintenance costs.

This calculation should be done for every year you anticipate owning the property, as your return will change over time.

There are also many variables that can affect your rental property's performance, like housing market ups and downs and your ability to keep it rented.

Investopedia has easy examples for calculating the ROI on rental property for cash and financed investments. Using these examples can help you make an informed investment decision.

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If you have questions about rental real estate investments, or want to view some of the available properties in Chicago and/or the suburbs, CONTACT US.  We have agents with deep knowledge and experience in Chicago multi-family investments ready to help you achieve your goals.