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Average ROI of Real Estate in 2022

Before you invest in real estate, there are a lot of factors to mull over when determining which investment will work most effectively to meet your financial goals. A return on investment (ROI) is one of the most significant details investors take into account to determine whether a real estate investment will be worthwhile. After all, the whole point is to make your money work for you, right? 

As many real estate investors know, it’s not always a question of getting out what you put in. In fact, with the multiplicity of real estate investing options available on the market and variables that can affect any venture over the course of its term, projected returns don’t always match up to reality. With that in mind, some investment options offer more reliable returns than others.

In this article, we will take a look at the average ROI a real estate investor can expect in the United States, how to calculate it, and what you can do to maximize your return on investment.

Quick Definition: ROI

Return on investment is a metric used by investors to determine the total gain they will make from an investment project after accounting for the associated expenses. Returns are expressed as a percentage of the total amount you have invested. They indicate what percentage of that value you have gained back by investing.

The higher returns an investment offers to the investor, the better it is considered to be. The real estate market is one of the highest return investments in the world. 

Complications in Calculating ROI

When you start to think about the viability of a real estate investment, it’s worthwhile taking time to understand the external factors that could influence your overall ROI calculations. These may include the terms of your financing agreement and expense increases that occur outside the spheres of your control.

For example, when a property gets refinanced or a second mortgage is taken, your interest may increase, or you may be charged refinancing fees which affect your bottom line. If you’re the owner of a commercial or residential property, increases in utility rates, property maintenance, or property taxes can also impact the overall costs of your investments. Secondary calculations may be necessary to adjust your ROI expectations in this case.

Certain investment types such as professionally managed commercial real estate syndications or REITs can bypass these additional expenses.

How Do You Calculate ROI?

Money Maker

When an investor calculates ROI, they essentially figure out the ratio of an investment’s profitability compared to the amount spent on it. It might sound complex, but in most cases, it isn’t. Generally speaking, the ROI of an investment is the total gains minus the total cost, divided by the expense of the investment. Here is what the formula looks like:

(net gain – net cost) / net cost = ROI

With this in mind, it’s important to note that many investments come with variable factors. These variables may include your investment strategy, the sum of money you initially borrow, maintenance and repairs costs, and your mortgage terms. Each can independently affect your ROI. Let’s take a look at how to calculate ROI for various investment property scenarios.

Resales and Cash Sales

Imagine an investor purchases a vacant foreclosure property for $100,000 cash, and she knows that similar homes in good condition can sell for $200,000 locally. She spends $60,000 renovating the property and then takes it to the market with a resale price of $200,000. Let’s have a look at the numbers:

Net profit (200,000 – 160,000) / net cost (160,000) = ROI (0.25) = 25% returns.

The investor leaves the deal with a 25% return on investment.

Rental Investment Property

To determine the ROI for a residential property, we add a few more steps to the ROI calculation. You can begin by calculating your projected annual rental income. A common way to achieve this is to look for the monthly rental value of similar properties in the area you want to invest in, then multiply this number by twelve.

When you have your expected annual rental income amount, you can determine what the rental property’s net operating income (NOI) will be. The NOI shows how much profit you make per year after accounting for all property expenses. Notably, we don’t include the mortgage in these expenses, as the mortgage value is used later on. Some of the following expenses may contribute to your net annual costs:

  • The purchase price or your down payment
  • Monthly expenses, including insurance costs and utilities
  • Tax expenses
  • Improvements and maintenance costs
  • And homeowners association or other applicable fees you pay

The following equation helps calculate your net operating income.

Annual rental income – annual operating expenses = NOI

With your net operating income, you can calculate your ROI like so:

NOI (annual rental income – annual operating expenses) / mortgage value = ROI

Multifamily Syndication Partnerships

Buildings View

If you’re looking for a passive investment, partnering with a professional syndicator means you can enjoy the returns without doing any work (or the calculations). Professional multifamily crowdfunding syndicators like Holdfolio allow investors to select which investments they want to participate in and invest the amount of money they choose.

Holdfolio has vertically integrated property management, construction, and real estate investment experts to manage investments. This means passive investors have access to the excellent returns multifamily property offers without doing any of the work themselves.

Holdfolio invests alongside their partners to ensure that everyone wins together. What’s more, you can invest in commercial real estate for as little as $20k! If you want to experience the advantages of great returns in real estate investment without the burden of property management, contact Holdfolio today.

What is the Average ROI in Real Estate?

With so many different types of investment strategies and variables in the real estate spheres, it’s hard to find a single average that encompasses the entire market. The S&P 500 Index has determined that the umbrella average ROI in real estate over the past two decades has been around 8.6%.

However, there are limitations to this value. First, this value is measured across various investment strategies, such as residential real estate investment, commercial real estate investment, and REITs. Secondly, estimating the long-term average comes with limitations due to major market fluctuations. An example of this is the dramatic collapse in housing prices during the financial crisis in 2008 or the unprecedented economic turmoil of the covid-19 pandemic.

Nonetheless, many investors and analysts alike use this number to determine whether a strategy or project is likely to deliver higher-than-average returns. Another value worth considering when you purchase a real estate investment property is the average ROI real estate investors in your local area see for their investments.

What is a Good ROI for Real Estate Investors?

Based on market standards, a good return is any return that exceeds the benchmark set by the S&P 500 Index average. That said, what any given individual considers to be good returns in a real estate investment can vary depending on their risk tolerance. 

As a general rule, high-risk investments have the potential to produce higher returns on investment than low-risk investments. However, this means that investors must have the financial backing to absorb the loss if their investment falls through.

On the other side of the balance, risk-averse investors may be happy to gain lower returns for an investment that provides them with more certainty.

How Can Real Estate Investors Get Above Average Returns?

Profitable real estate investing is driven by the multitude of strategies and asset classes an investor has to choose from. Between commercial real estate, residential real estate, flipped property investment, real estate investment trusts, and other professionally managed investments like syndicates, investors can design their investment journey as they please.

Whether you want to invest a lot or a little, manage your asset actively or enjoy an entirely passive investment, or choose between high-risk and high-returns or low risk and more certainty, real estate investments cater to nearly every investing appetite. Here are a few ways to get above-average returns with real estate.

Diversify

One way to increase your average return is to protect yourself from risk. When you diversify your real estate portfolio, you incorporate a variety of investments or asset classes into your portfolio. Diversifying can help protect you against potential risk because one asset class will respond differently to market shifts than another. For example, if you are invested in rental properties and the local market takes a hit causing the value of houses in the area to drop, a commercial real estate investment will not be affected in the same way.

Diversification offers hedging against inflation and market shifts in any investment portfolio. So if you’re not yet in the real estate market, a small real estate investment can help protect your finances and increase your average returns.

Get Above Average Returns in Real Estate Investing the Easy Way

Buildings Landscape

The simplest way to get above-average returns in your real estate investment is to invest with Holdfolio. Our partners receive a current average return of 19.33%, which is over twice the national average! What’s more, Holdfolio investors are entirely passive, meaning there are no ongoing maintenance and management expenses attached to their investments, nor are there any demanding property management responsibilities. 

Our investment specialists perform in-depth market research to ensure projects produce consistently good returns for everyone. To check your return on investment with us, you can use Holdfolio’s return on investment calculator. This tool factors in the amount you wish to invest and the duration of your investment to predict your total investment returns at the end of your term, making it easy for investors to calculate their return on investment.

If you’re looking for a completely passive commercial real estate investment that produces higher than average returns with reduced risk, talk to Holdfolio today.

Alternative Ways to Measure Returns

Return on investment is one metric used to determine how good an investment is likely to be, though it doesn’t encompass all aspects that contribute to success in real estate investing. Investors and financial advisors commonly use several metrics, as outlined below, to build a more comprehensive picture of the profitability of an investment strategy when applied to a specific investment property.

Cash on Cash Return

Calculating cash on cash (CoC) return uses a similar formula to the ROI calculations, though it substitutes a few values to give you a slightly different picture of your investment returns.

Rather than using your property price, you look at all the cash you have injected into the property (including the purchase price). Instead of calculating the difference between your rental income and your expenses, you look at your annual pre-tax cash flow. Here is the equation that determines cash on cash returns:

Annual pre-tax cash flow / total cash invested = CoC

Cash on cash returns can vary depending on your location and market conditions. The range usually sits between 6% and 12% returns.

Capitalization Rate

The capitalization rate (or cap rate) is a ratio of the annual rental income a real estate asset produces to its current market value. Cap rates are an effective way to compare the profitability of different asset classes or localities. The cap rate is determined by dividing a property’s NOI by its sale price, purchase price, or the fair market value (FMV) of the property. Here is the equation:

Net operating income / fair market value = cap rate

Similar to CoC and ROI, the average capitalization rate of a real estate asset will vary depending on your location. The range is generally from 6% to 12%.

Working with PC

Internal Rate of Return

Calculating the internal rate of return (IRR) is how financial analysts, investors, and real estate professionals evaluate property over time. It compares a real estate asset’s future value based on today’s dollar, with the asset’s current value to determine the profitability and risk involved in the investment.

The calculation is somewhat more complicated than the above equations, though there are plenty of IRR calculators easily found online.

Final Thoughts

The average ROI real estate produces is a critical metric used by investors and financial analysts to determine the viability of any given investment. Most investors want to know their money is working hard for them and producing good returns. However, depending on the risk tolerance, some investors may have to sacrifice above-average returns to attain a more secure and low-risk investment option to grow their wealth.

In general, diversifying your real estate portfolio is one of the best ways to protect your investments against potential losses and achieve above-average returns. However, for many, this will require a significant investment of time and resources to achieve higher than average returns.

Investing in professionally managed commercial real estate with crowdfunding syndicators like Holdfolio is a popular way for passive investors to achieve significant returns for as little as $20k in the bank. If you want an entirely passive, low-risk investment that produces consistently excellent returns, contact Holdfolio today.

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TJ Lokboj

TJ Lokboj is an entrepreneur with a passion for adding value to the real estate investing industry through adopting digital transformation. Some of TJs companies have been featured in Yahoo Finance, Morningstar, Benzinga, and many other publications.

TJ is the managing partner of Holdfolio, a real estate investment firm that leverages a premier crowdfunding platform.

He is also a member of the Forbes real estate council and co-founded SyndicationPro, which is the #1 syndication management SaaS solution in the market today.

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