REAL ESTATE INVESTING

Calculating Your ROI - If you’re looking to earn rental income through your investment property, you will need to determine the property’s ROI. ROI is how much money you made divided by how much money you spent, expressed as a percentage. 

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.

DEPRECIATION - 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.