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What is the Average Return on Real Estate Investment?

May 12, 2015

Average Return on Real Estate Investment

Real estate investment during your senior years is a great opportunity to supplement your income, and even establish a solid business. One of the possibilities that has gained a lot of popularity lately involves the purchase of distressed properties that are renovated and then rented out.

Renovated distressed properties are an interesting niche for investment that almost guarantees long-term returns. To determine whether this possibility is the right one for you, it’s important to understand both the specifics and the return.

Average Returns

The average gross return on investment in a distressed property is 21 percent or 46,000 dollars per sold home, according to RealtyTrac data. The ROI depends on the amount invested and the location of the property.

Despite increasing real estate prices, some markets still feature lucrative opportunities. According to 2014 statistics taken from the Residential Property Rental Report, investors that purchase distressed rental property can expect to earn a return of 9.97 percent per year.

Some distressed rental properties in favorable locations could produce a ROI of up to 20 percent, Investopedia reported. The city’s median house for purchase cost and the median rental price can be used to determine returns and whether the option is a lucrative one.

If you’re interested in this possibility, keep one important factor in mind. The 50 percent rule states that over time, 50 percent of your income will be dedicated to expenses like mortgage, renovation and maintenance. The return isn’t pure earning; some of the amount will go to keeping your investment properties going.

Advantages of Distressed Properties

The decision to purchase, renovate and rent out distressed properties comes with multiple advantages:

  • Affordable Prices: foreclosed or short sell properties are priced below market values because owners or banks want to sell them as quickly as possible.
  • Good Investment Return: though you’ll have to renovate distressed houses, the investment return can be lucrative.
  • Appreciation: depending on your approach, it’s possible for both the property’s value and the rent to increase over time.
  • Cash Flow: the amount you collect from the rent will most often exceed your maintenance and mortgage expenses.

A Few Shortcomings

Before deciding about the possibility, it’s also crucial to examine some of the shortcomings:

  • Renovation Costs: depending on the condition of the property, these could be significant.
  • Tenants and Mortgage: be prepared for periods without tenants when you will still have to pay the mortgage.

Renovation Specifics

When you buy a distressed home, you have to be ready to do repairs. To get the best results in the shortest period of time, you’ll need to hire professionals.

Turn-key properties are another option for property investment. These properties are already repaired and have tenants in place. Turn-keys have a property manager, even after the property is sold. The property manager takes care of everything facility problems to tenant disagreements.

How to Choose a Distressed Property?

Always think about the neighborhood and expenses that you will have to deal with before getting any return from the property. Buying the cheapest property will not guarantee long-term passive income. When you purchase an investment property, think about the needs and the preferences of tenants. Is the area popular for rentals and does the particular property offer everything necessary?

Search for properties near college campuses and consider how neighborhood will affect property price over the years. If you are looking for long-term tenants, buy three or four-bedroom family homes in neighborhoods having good schools, parks, shops and facilities.

By Gregg Cohen

I am a co-founder at JWB Real Estate Capital, and I love to talk about investing in rental properties! You’ll often find me here contributing to our blog and in our Facebook group connecting with the community & sharing insights.

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