How can you define a good real estate investment? This is a difficult question to answer as it depends on the person and what they wanted to achieve with the investment. The usual definition is the achievement of profit in relation to the purchase of a property. This can be clarified as property being high risk and the return made on this property being higher than had you invested the capital elsewhere.

Your net worth should increase proportionally to the amount of risk involved. It is worth noting that the investment amount should include all costs; purchase, fees, ongoing maintenance and closing costs. Equally the return is not just the selling price but the rent and any other income received from the property over the period of ownership.

Obviously there are many elements which can either not be foreseen or cannot be controlled. These make it very difficult to be certain that your investment will be a good one. There are different methods to work out the expected returns depending on whether it is an investment property or a personal residence:

Investment properties

It should be very easy to work out your monthly income from a property and your normal expenses. The income should be greater than the expenses! If you were then to multiply this figure to establish the yearly profit you would be able to work this out as a percentage of the purchase price. For example; you purchase a property for $30,000. Your monthly profit is $150 which makes your annual profit $1,800. Divide the annual profit ($1,800) by the purchase price ($30,000) and your cash return is 6%. In real estate, this would be considered good.

This is a simple calculation but provides an excellent guide as to whether a property will be viable or not. Of course, the property should be increasing in value.  If you take the cost of repairs and improvements over the year away from the increase in property value, a well managed investment should give a return of one or two percent  over the year. The two together make a 7-8% return on your investment which would definitely class as a good real estate investment.

These quick calculations should always be done before committing to an investment. No matter how good a property may look, if its net rental income is low compared to the purchase price you will at best have a zero return on your investment. More likely it will be a negative return and not one that most investors would wish to take on.

Personal Residence

The calculations can be a little more complex when it comes to purchasing your own house.  Purchase price aside you will need to assess the figures involved in monthly mortgage payments and monthly expenses. These costs will have to be put against the outlay of renting a similar property. The general rule of thumb is that if you are not intending to own the property for at least five years it is unlikely to add to your net wealth. This is because even if the monthly costs are the same as renting, the increase in value over those five years will only cover the costs of buying and selling. In this scenario you would, at best, be in the same financial position as before the house purchase. The normal outcome is that property expenses are higher than renting so you will actually be losing money!

Obviously, if there’s a blip in the housing market you may become lucky, but this is not a strategy you could adopt as a serious investor. The longer you own a property the more likely you will see a good return on it. The key to making money with real estate is to be informed. Know as much as possible about the market and understand that there are always some risks involved.

Just to be on the safe side, achieving good returns from property investment is almost a sure thing when you ask for help from professionals. Realtors and financial consultants in the housing domain can be of great assistance. Rather than risk making a huge mistake, in real estate it’s always best to be informed in order to make sensible decisions.