Thursday, October 24, 2013 / by Fra Jamir
If you are a Charleston area homeowner (or about to become one), you’ll be interested in the progression of your Charleston home’s value over time. The market may fluctuate, but what doesn’t is your goal of seeing your property value go up — in other words, calculating its Return on Investment. In economic terms, evaluating the projected ROI tells you how much profit there would be if the home is sold at a later time.
There are two major methods of calculating real estate ROI. Both take cost and appreciation into account — but they come up with quite different answers!
The Cost Method gives a smaller ROI. Consider buying a Charleston area house for $100,000. Ubiquitous Zillow (the Internet giant) pegs the current annual appreciation rate for real estate in the U.S. at 6%. If our Charleston market proves true to that projection, the example Charleston home value would register $106,000 after the first year. If $2,000 were spent on repairs, that means a $4,000 profit would result, and the ROI for that one year would be $4,000 divided by $102,000: 3.9%. At that ROI, it would take roughly 26 (100 divided by 3.9) years to equal the cost of the home.
Sometimes called the “Out of Pocket” method, this calculation yields a higher ROI. Here, ROI is calculated based on the size of the down payment (assuming a mortgage is involved). Take the same example: the Charleston home valued at $100,000. You won’t actually pay that whole amount — just the down payment (say, $20,000). To evaluate the ROI, the down payment is added to the repair costs ($20,000 $2,000) and that number is subtracted from the appreciated home value ($106,000-$22,000). The “equity” in this case is $84,000, so the ROI in that single year is $84,000/$106,000 = 79.2%. Although this sounds terrific, it isn’t too realistic…after all, the mortgage left is still owed: it may not be “out of pocket” because it hasn’t been actually paid yet, but the remaining liability is real.
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