For all investors in real estate or elsewhere, return on investment (ROI) is king. Nobody puts money into an investment they don’t expect to pay off, and maximizing that payoff is the drive behind every decision investors make.
The key to making successful, maximum-payoff, high-ROI investments is to understand the data behind every opportunity. Financial models that run multiple, well-calculated data points through a variety of mathematical equations, comparisons, and analyses are the best method investors have when forecasting the success of any new venture.
Financial Modeling in Real Estate
Real estate is a particularly lucrative investment vehicle because ROI can be realized in so many different ways: rental income, equity growth, asset appreciation, and more.
As with any investment, financial modeling is a critical tool to separate the wheat from the chaff in real estate. A thorough understanding of your local housing market, property values, and rental rates is necessary when searching for a new investment property, but this understanding is only useful in the context of actionable numbers and data — i.e., an appropriate financial model.
For rental properties, the basic formula for determining ROI is pretty straightforward:
ROI = net gains / cost of investment
This figure represents the percentage of the investment cost that’s realized as profit. The tricky part of this model is in estimating net gains and total costs before putting money down on a new property. And naturally, many different metrics are used to understand these numbers and their impact more fully.
To make all these calculations easier, we’ve created a free financial model to help you estimate and understand the potential ROI of any rental property. This free investment property calculator is not a substitute for professional guidance, but will make it easier to gauge the rough value of an investment you’re considering.
Once you’ve run the numbers yourself and found a property you think might be worth pursuing, we recommend you connect with an experienced local real estate agent. A good agent with investment knowledge will have both the intuition and the financial background to help you put your money in the right place — and maximize your ROI.
Clever Partner Agents aren’t just the best local agents — they’re also the most affordable, thanks to the Home Buyer Rebate they offer Clever clients. This rebate means that up to 1% of their commission goes right back into your pocket after closing. You can apply this rebate toward your down payment, mortgage premium, maintenance costs, or even in some cases take it straight as cash.
How to Use Clever’s Free Investment Property Calculator
To get started, simply go to our public Google Spreadsheet and make a copy of the document for your own personal use. Then, fill in the values on the Property Specs tab and a custom analysis will be generated for you on the Report Output tab. If you need help understanding any of the values you need to fill in, check out our written resources or — better yet — find a real estate agent who can walk you through the entire process.
The Clever investment property calculator will show you exactly how a property’s purchase value, tax rates, mortgage costs, monthly expenses, and rental income interact over time. You’ll be able to see such metrics as the investment cap rate, cash-on-cash return, and total profit at any time over an estimated 30-year mortgage. These values can be compared and contrasted with other rental properties to see exactly what makes one investment more likely to succeed than another.
And once you’ve got a handle on the numbers, don’t be scared to play around in the spreadsheet! Feel free to edit formulas, add new ones, and create additional charts or sections for a more detailed analysis of your potential rental properties. Diving deep into financial models like this one is what separates amateur real estate investors from the professionals.