REAL ESTATE INVESTING

If you’re looking to earn rental income through your investment property, you will need to determine the property’s ROI. Return on investment (ROI) is a way to understand the value of your investment. ROI is how much money you made divided by how much money you spent, expressed as a percentage. There are many ways to calculate ROI, but the cash-on-cash return approach might make the most sense if you’re using a mortgage to buy your rental home.

Calculating your ROI involves the following steps:

1. Estimate your annual rental income. This requires a bit of research. You can start by researching rent prices for similar properties in the area to understand what you could expect to rent your property for.
2. Estimate your annual expenses. When calculating this, include taxes, insurance, maintenance, repairs and any homeowners association fees. Add your mortgage payments, including interest.
3. Determine your net operating income (NOI). Calculate your NNOI by subtracting your annual expenses from your annual rental income.
4. Determine your total cash investment. You can find this by adding together your down payment, closing costs and any upfront renovation or repair costs.
5. Divide your NOI by your total cash investment. The result here will determine your ROI.

With so many variables to consider, there’s no single overall average ROI in real estate. It’s important to note that this average would depend on what part of the real estate market is being discussed, so while metrics are useful for predicting results, they are by no means a guarantee.

ROI depends on the amount of risk that’s inherent in an investment, and some risks like the pandemic and its effects on the commercial real estate market simply cannot be anticipated. Although these varying factors mean there’s no average to base your investment on, most investors aim for returns that match or exceed 10%.

Before anything else, you'll need to decide how much you can spend on your flip which includes the price of the property. 

• Repairs and upgrades. How much do you have to spend on fixes? What can you do yourself, and what will you need to hire a professional for? 
• Carrying costs. Consider what recurring costs you'll have to absorb while you own the home. That can include a mortgage, homeowners insurance, property taxes, homeowners association fees and utilities,
• Closing costs. Even if you're paying cash or buying at auction, there will be fees. 
• Your team. This includes tradespeople, a real estate attorney and a Realtor.

If you're using sweat equity and doing the work yourself, you may want to consider the value of your time. How many nights and weekends are you willing to give up for your flip?

Making a cash offer for your home flip can save you some money since you won't have as many closing costs and you won't pay interest while you're working on the property. Nearly 60% of home flippers paid cash for their properties in the first quarter of 2021, but not everyone has the ability to pay with cash, especially if it's their first flip.

If you have substantial home equity in your primary residence, a cash-out-refinance could give you the money to buy an investment property. A home equity loan could potentially serve the same purpose. These are risky, but if done right can save time and money. 

You can also get an investment property mortgage. This type of home loan generally has strict requirements.  

Investment property mortgage rates also tend to be higher than those for primary residences. Comparing rates and fees from more than one lender can help you find the most favorable terms.

Some house flippers choose for sale by owner, forgoing a listing agent (and their commission) in order to maximize profits. As with renovations, whether to go FSBO or work with a listing agent comes down to your priorities while selling without an agent will save you that 2.5%, it can also be time-consuming and you can miss out of buyers willing to pay more. It's better to have more options.

Depreciation is the process used to deduct the costs of buying and improving a rental property. Rather than taking one large deduction in the year you buy (or improve) the property, depreciation distributes the deduction across the useful life of the property. 

Real estate depreciation refers to the deductions in the value of a real estate asset to account for the depreciation in its value owing to its use during its lifetime. It can be used to claim tax deductions over the income generated from the asset and recover the cost of improvements. 

Real estate depreciation is a method used to deduct market value loss and the costs of buying and improving a property over its useful life from your taxes. The IRS allows you to deduct a specific amount (typically 3.636%) from your taxable income every full year you own and rent a property. 

• Rental property owners can use depreciation to deduct the property's purchase price and improvement costs from their tax returns.
• Depreciation commences as soon as the property is placed in service or available to use as a rental.
• By convention, most U.S. residential rental property is typically depreciated at a rate of 3.636% each year for 27.5 years.
• Only the value of buildings can be depreciated; you cannot depreciate the land buildings are built on.

When you buy a property to use as a rental (an investment property) you'll inherit all the costs of maintaining, improving, and managing it. Owning and renting property is considered a business endeavor because you're generating income from it. You'll also have to include any income you generate in your taxes.

Over years of use, the value of your rental property depreciates. So, the IRS gives you a break by assuming that your investment property will lose value over time as you rent and maintain it. It allows you to deduct those costs and loss of value by spreading it out over a period of years.

You can continue to depreciate the property until you have deducted your entire cost or other basis in the property or you retire the property from service. This applies even if you have not fully recovered its cost or other basis. A property is retired from service when you no longer use it as an income-producing property or decide to sell or exchange it, converting it to personal use.