So, you’ve made an investment into a small multifamily project and it just sold. What’s your ROI, your return on that investment? How do you calculate it?

We know that the return on our investments (ROI), or profits from a deal, directly relates to the specific percentage of money invested that is returned to us, an investor, after deducting any related costs. For those of us that might not be used to working with these numbers, the formula is essentially:

Before we can dig in and discover exactly what our ROI is, we need to take into consideration a few additional factors. Things like repairs, maintenance, and any interest paid on the initial investment loan need to be factored in before an accurate ROI can be figured.

There are two specific methods for calculating ROI and they include:

1. The Cost Method

Basically, to figure ROI using the cost method, we divide the total equity, or value of the property, by the total costs associated with acquiring and rehabilitating the property to be market ready.

An example of the cost method, let’s say we buy a multifamily four-plex for $100,000. We then invest an additional $20,000 in repairs and $30,000 in upgrades to the property, which causes the property’s current market value and our investors equity to rise up to $200,000.

To figure the ROI using the cost method, we take the $100,000 we spent to purchase the property + $50,000 additional investment into the property = $150,000.

We take the current market value or equity of $200,000 $150,000 = $50,000.

Finally, we divide the equity by the total costs, or $50,000 profit divided by $150,000 investment, and we get an ROI of 33%.

2. The “Out-of-Pocket” Method

A favorite of most real estate investors, the “out-of-pocket method” is preferred by most because it yields a higher ROI percentage.

If we looked at the same deal we used in the cost method, but figured our ROI using the “out-of-pocket” method we’d get a different outcome because this method only accounts for the actual out-of-pocket expenses and relies on the leveraging of financing to do the deal.

If we were to look at the same four-plex deal, but instead this time we finance the purchase with a loan that we put down 20% or $20,000. This time our only out-of-pocket expenses will be the $20,000 down payment + $50,000 in upgrades and repairs =$70,000.

Now, when we take the current market value or equity of $200,000 $70,000 = $130,000.

Finally, we again divide the equity by the total costs, or $130,000 profit divided by $200,000 investment, and we get an ROI of 65%.

Cash Flow ROI and Some Possible Complications

When figuring ROI for a multifamily real estate investment, there is the return on the initial investment that will be realized once the property sells and then theres the return that can be figured based on the rents a property delivers annually.

For example, if youve invested $100,000 in a property that yields $5,000 a month in rents or $60,000 a year, your cash flow ROI would be 60% a year.

When it comes to equity, it is important to understand that equity isnt cash and before any return can be realized, the investment must sell.

In any market, properties sell all the time for below-market value which will then obviously reduce the overall ROI. It is also important to note that there are additional costs of selling a property like agent costs, advertising, inspections, maintenance and upkeep.

Other complications that might affect initial ROI calculations might come from refinancing or second mortgages on the property.

In the end, when calculating the return on investment for any deal, its important to take into consideration any possible cost factors involved to ensure we get the most accurate ROI percentage we can.

Are you looking to grow your multifamily investments? Looking to try a few online ROI calculators? You can try this one from RentalPropertyReporter or this one from CalcXML . Be sure to share your useful and interesting comments in the section below.

Rentlytics  provides deep analytics for apartment property owners and managers. Through Rentlytics, stakeholders can view and analyze their property’s operational and financial metrics more effectively and identify issues more quickly through our Apartment Intelligence platform, resulting in increased revenue and reduced expenses at each property across your entire portfolio. Connect with us via our “Multifamily Data Experts ” LinkedIn group or email us at info@rentlytics.com .