Choosing the best investment property is only the beginning of your work in the real estate investment market. As time goes by, you’ll need to monitor and evaluate your investment performance – to see if the investments (properties) are working together in your real estate investment portfolio.
In this article we’ll see how necessary it is to evaluate your investment performance over time, as it helps investors determine whether or not they’re on track to achieve their financial goals. But, before you, as a real estate investor, can evaluate your performance, you first need to determine the return on investment you are trying to achieve.
If investments are not showing any returns or the return on investment is slipping, investors would need to determine why this is the case and decide on the next move to recover. In addition, because the real estate investment market changes all the time, you have to be attentive and find investment opportunities that will improve your real estate investing portfolio’s performance.
- Equity Growth from Appreciation:The main reason why investors put their money in real estate is capital appreciation. Therefore, the most important metric that such investors are interested in, is the equity growth that they have created as a result of holding on to their property.
Thus, these investors keep a track of their monthly mortgage payments which include interest as well as principal payments and then use the market price to determine whether or not the equity that they have built in the house is greater than the expense that they have incurred as a result of holding on to the house.
- Consider the role of taxes on performance:To evaluate real estate investment performance, it is important to calculate tax returns as some interest income may in fact be tax-free. In this case, even though you may earn a lower interest rate, your rate of return on your investments could actually be higher than the return on investment.
- Understand the reasons behind your performance:There are plenty of reasons why your real estate investment is performing the way it is – the market conditions, the mix of investments you own, how long you’ve held your investments, or even a combination of these factors. In any case, you need to stay aware of these reasons.
4. Factor in inflation: If you buy and hold a real estate investing property in the long term, inflation plays a big role when you evaluate real estate investment performance using rate of return. Inflation is when your money loses value over time. It’s the reason why a 1000 naira in 1950 could buy a lot more than today. The rate of return calculation that takes inflation into account is called real return. To calculate the real return, real estate investors have to subtract the rate of inflation from the percentage rate of return. For example, if the rate of return on your investments equals 10% in a given year, but inflation sent prices rising 3% in that year, then your real return would be only 7%.