Real Estate Investing 101: Things to Know About Your Home’s ROI

Assign author|December 11, 2022
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Have you decided to begin your real estate investment journey but don’t know where to start? Approximately 60% of the world’s assets are real estate, including corporate, national, and personal wealth. For this reason, it’s easy to see why real estate investments are a good opportunity, but you’ll want to know the basics before you make any decisions. Not all real estate investments will make sense for you, but understanding the basics will help you along the journey.
You probably think about your home as an investment, but there are many other options for investing in real estate, and this article will cover those. Below you’ll find the 941Team &  Steve Slocum’s introduction to real estate investing: what it is, what it means, the types of investments, and essential factors to consider. The first question to answer is simple.

What is real estate?

Again, you’ll likely think of your home or the land it sits on, but that is not a complete definition of real estate, merely components. According to the Uniform Standards of Professional Appraisal Practice, real estate is defined as “Any identified parcel or tract of land, including improvements, if there are any.” The most significant factor in understanding real estate lies in “improvements.” This is because it signifies that real estate is not simply the land but anything that is fixed or permanently attached to said land. These improvements can include things such as the home, office building, stores, or any other structure built on the property. They also include fences, streams, trees, roads, or anything else permanently affixed to the property. There are also rights to the property that you’ll want to consider, like water rights and mineral rights to natural resources that may be found.

What does it mean to be a “real estate investor?”

Now that you know the depths of real estate, let’s discuss what it means to be an investor. Whether you’re an individual or a business, investing in the market by purchasing, leasing, or acquiring the rights to a piece of real estate makes you a “real estate investor.”  Though those are the usual categories people think of when it comes to investing, there are several other investment opportunities you can find. For example, you can purchase the mineral rights to a parcel of land, invest in a real estate investment trust, or participate in a real estate crowdfunding platform. To stick to beginner basics, let’s talk about the more common areas of real estate investing and how they work.

Rental homes

Rental homes are a widespread form of real estate investment that involves purchasing a home and renting that property to another party. This makes you the landlord and requires you to be responsible for paying the mortgage, property taxes, and insurance, maintaining the property, and dealing with any issues. Many people who choose to invest in rental properties hire a property manager to handle everything for them, which eases their stress but still allows them to make a profit on their investment. The simplest way to make money is on the rent, but appreciation is another way your property can provide a significant return. There are plenty of homes for sale in Lakewood Ranch that would make excellent rental properties if this area of investing interests you.

Flipping homes

Another standard method of real estate investment, especially in the days of HGTV, is by flipping houses. The main difference is that those who are “flippers” do not purchase their properties with the intention of hanging on to the investment but rather selling them quickly and for a profit. You can buy a property to make repairs and updates to the home that will increase its value significantly. This process is ideally done quickly, and you can maximize profits with little investment.
Subsequently, you can purchase a home for a good deal as the market is rising, hang on to it for a short period, and then sell it for a profit when the market becomes hot. The thing to watch for with these investments involves the risk that you won’t be able to sell the property for a profit. However, will plenty of knowledge and patience, this makes an excellent investment option.
Obviously, this is not an extensive list of the types of investments, but some of the more common ones you’ll be likely to encounter. Another essential thing to know about when investing is the return on investment (ROI).

What is an ROI?

Your return on investment measures how much profit you’ve made as a percentage of the total cost. This is done by looking at the amount of money you’ve invested, including initial fees and other investments, to the current value. Several methods are used to calculate your ROI and determine whether you’ve got a good investment.
The cost method divides the investment in the property by the initial cost. Let’s say you purchase a home for sale in Bradenton for $100,000 and make $50,000 worth of repairs and upgrades, and now your home is worth $200,000. This would make your gain $50,000. Divide the profit by your total cost, and you have an ROI of 33%.
Another method is the out-of-pocket method, often preferred because the results are usually higher. This process divides the home’s current equity by the current market value to find the ROI. So the same $100,000 home was financed with a down payment of $20,000, and you’ve made $50,000 worth of repairs resulting in a total investment of $70,000. The property is still valued at $200,000, and with your investment of $70,000, your potential profit is $130,000. Divide again, and you have an ROI of 65%. There are many other things to consider when trying to figure out your home’s ROI, but this is a general guide.

Begin investing in real estate with 941 Team Homes

As you can see, real estate can be an excellent investment and a great opportunity to build additional wealth. The most important thing to consider is keeping your expectations realistic and doing your due diligence to ensure you have all the necessary knowledge. Contact 941 Team Homes if you’d like to know more about the process or are interested in Bradenton, Sarasota, Parrish or Lakewood Ranch real estate investing.

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