While the stock market can take you on a roller coaster ride, real estate tends to be a very stable asset class that helps people to build wealth. Property values have been increasing dramatically over the past few years, e.g., the average real estate appreciation in 2021 was 14.5%.
However, you don't even need to be a property owner to take advantage of these gains.
While some investors purchase office space or rental property, there are a variety of ways to invest in real estate. Many real estate investors find that it is easier and faster to invest in real estate without buying property. This can be done through a real estate trust (REIT), real estate mutual funds, real estate EFTs or EquitySlice Investment Funds.
Assessing Your Return on Investment
As with any investment, you want to continually monitor it and determine whether it is profitable. Regularly calculating your ROI should be part of your market research and help you to maximize your investment. It will also help to ensure that you are earning a decent return. This should be done periodically on a quarterly or yearly basis.
To properly assess your real estate investment, you must make sure that you consider all expenses. A physical property includes the down payment, closings costs, mortgage payment, and property taxes when you invest. Some people may forget these are included as part of the investment because they have many other things to track and pay for as property managers.
Ways To Invest in Real Estate
There are many opportunities for all kinds of investors. If you are someone who is hands-on and likes to make home repairs, investing in a physical rental property can provide you with a steady cash flow. People who have less time but are looking for a solid return may want to look into real estate trusts. Even if you only have $1,000, you can invest in real estate.
Real Estate Investment Trusts
A real estate investment trust, or REIT, is an entity that owns or invests in income-generating real estate. They are run like mutual funds for real estate properties because they enable people to invest in commercial real estate without going through the hassle of actually purchasing and managing the property.
A REIT must have at least 75 percent of the funds in real estate, cash, or U.S. Treasuries. A REIT also must pay at least 90 percent of its income to shareholders just like a dividend-paying stock. The REIT is required to have a board of directors or trustees to manage its investments and at least 100 shareholders after one year.
REITs are attractive to investors because they have the potential for high returns in the real estate market and are affordable. They don't require a sizable minimum investment. They earn passive income by paying dividend yields much better than the average savings account at around five to 10 percent with some that are as high as 30 percent. This remarkably outperforms the S&P index.
Publicly traded REITs are extremely liquid and allow you to access your investment quickly if you ever need it. They have a low correlation to other assets which makes them a great way to diversify your portfolio.
Money Market Fund Investing
Money market funds can be a form of real estate investing if they include investment property in their portfolio. These portfolios are then sold by brokerage firms and mutual fund companies to investors in the form of mutual fund shares. These shares will then pay investors dividends when they get returns on their investments.
These funds often pay better interest rates than savings accounts and the interest is paid out to the shareholders like dividend-yielding stocks. Money market funds are also liquid, so you have access to your money when you need it without facing penalties.
Commercial and Residential Property
If you are a person that enjoys having physical assets, you can purchase commercial and residential properties. These can provide a steady rental income, but you will have to maintain the properties. The tenant's rental income will help you to pay off the mortgage and in time you will own the property.
Calculating Your ROI
There are a few options to determine the average ROI for a real estate investment. These are the yield and the total return. The yield is a calculation that demonstrates the investment performance over a defined period. Strong yields will correlate with strong overall investments. The yield will give you a snapshot of how the investment is doing from month to month, but can't give you the overall performance.
Yield
Mutual fund investors will be interested in the dividend yield. You can track the history of the dividend yield to predict what the expected dividend will be for each quarter. This information won't indicate how much the mutual fund has depreciated or appreciated. There are a few yield calculations in real estate including the cap rate, cash-on-cash returns, and return on cost.
Total Returns
The total returns paint a more complete picture of the investment. They factor in the cash flow from the project, the appreciation, the loan paydown, and the gain on your total investment. The total returns in real estate include equity multiple, the annualized rate of return, and the internal rate of return.
CAP Rates
One of the most commonly used metrics for measuring real estate investments is the cap rate. Cap rates indicate the expected rate of return on a given investment property. It is the Net Operating Income/Purchase price. The cap rate never factors any of the mortgage payments or capital spending into the equation. The capital expenditures include roof replacements, new siding, and other major renovations, which can add up.
The cap rate is used to compare similar properties in the market and their quality. Cap rates can be greatly impacted by various operating factors. They are also easily manipulated, so it is important to do the calculations for yourself.
Calculating the Return
Your return on investment (ROI) is the difference between the investment gain and the purchase price divided by the investment cost. For example, the return on investment of a $100,000 real estate trust with a $20,000 gain would be calculated ($120,000-$100,000)/$100,000=0.2 x 100 = 20 percent.
If you are looking for the return on investment on a physical property that has rental income, you would take the annual rental income, subtract the annual operating costs and then divide it by the mortgage value. So, if you are carrying a mortgage of $150,000 for a duplex and had two families paying $2,000 each month. You would calculate that by ($48,000-$12000)/$150,000=0.24x100= 24 percent.
What Is a Good Real Estate Investment Return?
Identifying a solid real estate investment can help you maximize your profits. You don't want to be investing in the lowest investment, you want to make sure that your return is on par with other real estate investments. Depending on the selected investment, real estate often generates a 5 to 10 percent return.
Rental properties usually provide a return of just above 10 percent, but there is a lot of risk to running a rental property. The net operating income can exceed your profit if there are several accidents and repairs to be made on the property. Some of the factors that are used to calculate the value of the home are out of your control, like the neighborhood and schools.
Conclusion
Real estate properties as well as trusts and mutual funds can play an important role in your portfolio. We hope this overview helps you to understand how to evaluate your real estate investment returns. A simple equation can help you calculate the returns that you are receiving and compare them with other products.
EquityBrix can help you grow your wealth through our fractional real estate investment platform. Our team marries the needs of investors and real estate developers by providing opportunities for above-market returns. EquityBrix is committed to creating high-yield investment offerings, and we can help guide you through the new era of real estate investing.
If you want more information about tokenized real estate investing go to EquityBrix or EquityBrix.com/Learn.
If you are looking to grow your wealth and diversify your investment portfolio by learning about innovative ways of investing in real estate go to EquityBrix, or contact us for more information, or sign-up for the EquityBrix Newsletter.
*Disclaimer: EquityBrix is not an investment adviser. This information is for educational purposes only and does not constitute investment or tax advice. It’s important to be informed and to make your own investment decisions or do so in consultation with a professional financial advisor. Under no circumstances should this material be used or considered as an offer to sell or a solicitation of any offer to buy an interest in any investment. Any such offer or solicitation will be made only by means of a written online prospectus relating to the particular investment.
Frequently Asked Questions
Why is real estate a good investment?
There are several reasons that real estate is a great investment. For example, you can leverage the investment, force appreciation, gain tax benefits, and earn regular cash flow based on which investment you select.
You Can Leverage Your Investment
Real estate trusts and funds allow you to invest in assets that are worth much more than you have to invest. If you have $10,000 to invest in stocks, usually you can only buy $10,000 in stocks unless you happen to have a margin account because you are an accredited investor with a large net worth.
When investing in real estate, you can buy shares of a real estate investment trust or take out a loan to finance a physical property as long as you have good credit and can prove that you have a stable income. When you put down $10,000 in real estate, you are investing in an asset that is worth five times as much.
You Can Force Appreciation
Stocks and bonds are vulnerable to changing market conditions. Real estate values can be forced to appreciate. Properties appreciate naturally and on average they appreciate three to five percent a year without doing anything aside from maintaining the home. By making renovations and repairs, you can increase the value.
It is important to find out the property trends before making renovations or investing in real estate trusts. Work with a licensed appraiser or realtor to discover the best properties and renovations before you invest. While not every renovation will have a return, some of them pay back as much as 80 to 90 percent.
You’ll Get Tax Benefits
As a real estate investor, you may be eligible for tax advantages. Since you are the owner of the property and rent it out, you are the landlord. It is a business. You can write off some of the annual operating expenses including mortgage interest on the loan origination points paid on the loan, maintenance expenses, depreciation, homeowners association dues, homeowners insurance, and real estate taxes.
Make sure that you consult with your tax advisor before writing off expenses to ensure that your property is a benefit to your portfolio. They may be able to advise you on investments with a better cash return.
You Can Earn Regular Cash Flow
If you decide to own investment properties in addition to your primary residence, you may generate a regular cash flow from them. It is important to calculate your net operating income on rental properties to ensure that your initial investment is paying off.
If you buy and hold an apartment building, you can earn regular income through the tenants. As you pay the mortgage payments, over time you will own more of the property over a few years.
Of course, your average annual return will vary from year to year based on the repairs that need to be made, the monthly rent and the number of tenants. There is always a risk that tenants may default which will impact your return.
How to calculate return on real estate investment?
There are several equations that you can use to calculate the return on your real estate investment based on the information that you have. For REITs and money market funds, you can calculate ROI based on the increase in the investment value.
If you are investing in a multi-family property, you will need to gather the net operating income from the investment property. You will need to subtract your operating expenses, insurance premiums, and mortgage payment from the monthly rent payments. Divide that by the mortgage value. This will be your property ROI calculation.
ROI = (Investment Gain - Initial Investment Cost) ÷ Investment Cost.
ROI = Net Profit ($200,000 - $150,000) ÷ Total Value of the Investment ($150,000)
ROI = (Annual Rental Income - Annual Operating Costs) ÷ Mortgage Value.
These equations will help you track your investments, so you know which ones are providing you with more money. Closely monitoring your returns will allow you to build wealth more quickly.
Is real estate a good investment in 2022?
While today's high real estate prices and uncertain climate make it a challenging time to invest in real estate, there are plenty of investment opportunities in 2022. By assessing your risk tolerance and selecting the right investment, you can still enjoy great returns without the hassle of being a property manager.
Check out the 11 Best Low-Risk Real Estate Investments to discover different ways to invest in real estate in 2022. There is bound to be one that will fit into your portfolio and heal you and build wealth.
