Real estate investors who buy REO properties naturally understand the importance of making a profit and achieving a favorable return on investment (ROI).
But unlike most investment real estate, REOs present a particular challenge because they typically require estimated repairs and holding costs that have to be concise enough to make a sound investment decision quickly.
In this article, I want to show you a quick and easy way to calculate profit and ROI for those of you who buy REO properties with the intention to fix ‘n flip properties inside twelve months.
The solution is iCalculator – a web-based real estate calculator I developed that makes dozens of real estate calculations and displays the definitions and formulas at the same time. So you can learn as you calculate.
But no worries. This article is foremost intended to be instructional for those who buy (or intend to buy) REO property and not just a shameless plug for my real estate calculator (at least not entirely). So bear with me and please read on.
Profit
Profit is the amount of money you pocket once the property is resold and all costs associated with the acquisition, rehab, and holding are satisfied. In other words, cash inflow less cash outflow.
Sale price
– Cost of sale
– Loan repayment
– Total investment
= Profit
Return on Investment
This is the percentage rate of return you will make on your total investment based upon the amount of profit you expect to achieve.
Cash down
+ Cost of acquisition
+ Interest paid (loan)
+ Origination fee (loan)
+ Rehab costs
+ Holding costs
= Total investment
ROI = Profit / Total Investment
Example
You can buy an REO for $125,000 all-cash with closing costs of $1,150. Property taxes are $3,500 and insurance is $1,800 annually. Utilities should run $80 monthly and you will include $3,000 for other costs. You want to budget $25,000 for rehab costs. You believe the property can be turned around for $220,000 in six months and expect to pay 5% of the price for closing costs.
To make the calculation manually, simply plug the numbers into the formulation provided above. You should get a profit of $51,720 and a 32.88% return on investment.
But let me show you how easy it is to estimate your profit and return on investment for this project with iCalculator.
Illustration (click images to enlarge)
Source: iCalculator by ProAPOD
Source: iCalculator by ProAPOD
So You Know
iCalculator makes dozens of real estate calculations with the formulas. You can try it risk-free and save 50% (you pay just $24.95). Click here to learn more and get the discount.
