Income from your property investment is often spoken of in terms of ROI, or Return On Investment. It is the bread and butter of an investor, particularly knowing what exactly is being quoted. ROI is generally Gross ROI. It is calculated by dividing a property’s gross annual rent by the total purchase price. There is no allowance for property expenses. For example:
Property ‘A’ is purchased for $100,000 and rented for $1,000 per/mth. Annual income = $12,000. Gross ROI is $12,000 divided by $100,000 = 12%.
Property ‘B’is also purchased for $100,000 but rented for $1200 per/mth. Annual income = $14,400. Gross ROI is $14,400 divided by $100,000 = 14.4%.
County taxes in Nevada are lower than many states
Net ROI factors in property costs other than mortgage holding costs as not all people have mortgages. These costs typically include management fees, taxes, insurance and Home Owner Association Fees (HOA).
Some people also factor an allowance for property maintenance or may take out home warranty insurance.
I have found that the biggest killer to net ROI is large HOA’s most commonly found in condo complexes.
Presuming the property costs of both ‘A’ and ‘B’ are the same: Management Fee = 9%; Land Tax (Rates) = $600 per annum; Insurance = $420
Property ‘A’ Net ROI = $12,000 x .91 = $10,920 - $600 - $420 = $9,900. Net Income of $9,900 divided by $100,000 = 9.9% net ROI.
Property ‘B’ Net ROI = $14,400 x .91 = $13,104 - $600 - $420 = $12,084. Net income of $12,084 divided by $100,000 = 12.1% net ROI.
Attractive condo facilities increase HOA fees significantly
Let’s see what difference a HOA of $160 per/mth or $1,920 per year makes:
Property ‘A’ Net Income of $ 9,900 - $1,920 = $7,980. New Net ROI = $7,980 divided by $100,000 = 8%
Property ‘B’ Net Income of $12,084 - $1,920 = 10,164. New Net ROI = $10,164 divided by $100,000 = 10.2%
Thus ROI allows us to compare different properties and the different expenses they may have. If a property has a high Net ROI it will have a high annual cash flow compared to its purchase price.
Neither Gross nor Net ROI considers the cost of funding your investment, either the opportunity cost of a cash purchase or the interest cost of a mortgage.
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