What is the return on investment?
How to calculate ROI
High ROI in real estate
4 ROI in real estate projects
I will first state the obvious? Renovating or taking on a project takes money, time, specialized skillsets, all along while finding capable contractor resources. Please keep this in mind as a ROI can be negatively affected quickly. This is especially true if you have the incorrect 3rd party completing the work at hand. We purchase many properties each year due to incorrect work that was completed or someone took on a larger project that they could not finish.
Do you know what high return investment projects to focus on? Better yet, what can you do to create high ROI projects for your next rehab? The highest return on investment could mean the difference between a good rehab and a great rehab, so be sure to pick the right projects.
It is entirely possible to lose money by making the wrong upgrades. Some projects simply don’t warrant the initial cost. Conversely, there are projects that separate themselves from the rest, and actually return more profit when it comes time to sell. The real trick is to focus on the projects that don’t coincide with such drastic highs and lows—the ones with consistent ROI.
What is Return on Investment (ROI)?
Return on investment (ROI) is essentially a data point expressed as a percentage that identifies a project’s validity. In other words, ROI is used to determine which investments will add the most value to a property. ROI can be used to compare different assets, not the least of which include the projects I will hit on below. Not surprisingly, the projects with the highest return on investment should be at the top of your list.
How to Calculate ROI in Real Estate?
Being sure you have accurate estimations for ROI before starting a project is essential. By calculating return on investment for each project, you can evaluate which ones are most essential, what you can afford, and what will offer you the highest ROI. To calculate ROI, the return of an investment is divided by the cost of the investment. The result is expressed as a percentage or a ratio. Use the following formula to calculate ROI:
(Current Value Of Investment – Cost Of Investment) / Cost Of Investment = ROI
The “current value of investment” refers to the amount you receive after selling the property. Since ROI is calculated as a percentage, you can easily use this formula to calculate and compare the ROI of each home improvement project individually.
What is a Good ROI in Real Estate?
Unfortunately, the answer to “what is a good ROI in real estate?” depends on a number of factors and can vary per project. Location, the cost of the project, and the type of property you are improving all factor into the ROI of the project. Generally, you want a project with a lower cost compared to the amount of returns you will receive when selling the property. Below, we list a few home improvement projects with high ROI.
4 High ROI in Real Estate Project
There are several projects and improvements you can add to your property that have consistently high ROI. From simple projects like refinishing your front door to larger projects such as a kitchen remodel, let’s look at some of the projects with a high return on investment:
Kitchen & Bathroom Remodels
Replacing Front Door
Kitchen & Bathroom Upgrades
Let there be no mistake about it: the kitchen is the most important room in a home. There is no reason a significant portion of your rehab budget should not be allocated toward upgrading the kitchen. Accordingly, kitchen updates also coincide with relatively high ROI rates. While certain people will say location, location, location for real-estate there is also a known event that kitchens and bathrooms help sell homes. Kitchens have migrated to an open concept design as families and friends congregate there for engaging conversations and fun. Now, bathrooms are also very nice as it certainly feels amazing to shower in an expanded tile shower with a rain shower head compared to a standard 3-piece surround that might be purple in color. Newer kitchens and bathrooms are one of the most expensive remodels, so ensure to build a budget and make sure you stay under (if you can).
Coming in slightly under that of its fiber-cement counterpart, mid-range vinyl siding projects have been estimated to recoup 80.7 percent of their initial cost. With a lower cost than other types of siding, vinyl appears to be the most popular option. It still offers a lightweight, low maintenance, and relatively low-cost alternative.
Insulated vinyl siding can even offer a degree of thermal resistance, effectively reducing energy consumption that would have been used to heat and cool the house. Over time this can greatly reduce a home’s operating costs, making monthly bills more bearable. Not only that, but the installation of vinyl siding is shown to have a lower environmental impact than fiber-cement siding options. Now, fiber cement siding is very durable and more visually appealing, but you will pay more for the material and install. Both products are good alternatives. You can see some cost estimates that vinyl siding costs $201 per 100 square feet to install while fiber cement costs around $300.
Front Door Refinishing
Nothing has proven to be a better return on investment in recent history than a front door replacement. In fact, steel entry doors have been known to return approximately 101 percent of their initial investment upon resale. That means people are getting more back than they spent on the door itself when the time comes to sell. Some investors are hesitant to replace the front door because of the initial cost. However, it is proven that front door refinishing or replacement is actually the most affordable in terms of a high ROI.
Window replacement projects have withstood the test of time, and still account for one of the highest ROIs on a remodel. It has been estimated that mid-range vinyl window replacements can return as much as 76% of their initial cost at resale. You might be thinking, “will this really increase the value of my property as this sounds like just common home maintenance.” Yes, you are 100% correct, however, new home buyers will pay up if a home has new energy efficient windows. Many homeowners understand that this investment is a large one to make. Make sure to obtain many references and quotes as I have seen homeowners pay over $1,000 for a standard vinyl window size.