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Before you begin your journey as a real estate investor, here are some financial concepts you should be comfortable with:
Income is the money that comes in from your property. For example, if you own a rental property in Griffintown which rents for $1500 a month all in, plus $200 a month for the garage, the total income amount on your property is $1700 a month.
Income also takes into account bills, application fees, or any other value you receive from your rental.
Your property expenses are the costs that it takes to maintain your property per month. For example, your monthly mortgage payment, mortgage interest, condo fees, insurance fees, property taxes, and so on.
Let’s assume that the total expenses on your Griffintown rental are $1400 a month.
Think of your cash flow as your profit. Cash flow is simply the amount of money left over at the end of the month after all expenses are paid. In other words, (Income) – (Expenses) = (Cash Flow)
The monthly cash flow on your Griffintown Rental is, therefore, $300 a month.
Return on Investment:
This is where it gets a bit complicated. Real Estate ROI “return on investment” describes the interest rate you are making on your money per year.
For example, if you invested $1000 and you made $2000 from that investment ($1000 profit) in a year, you would have made a 100% return on investment.
The actual calculation for Return on Investment looks like this:
ROI = (V1 – V0) / (V0), (where V1 is the ending balance and V0 is the starting balance)
Roi in a Real Life Scenario
In 2014, you spent a total of 20,000 on your Griffintown income property, including mortgage payments, interest and so forth. By December, you find that you have $30,000 in your realty investment account.
Your ROI on the investment is:
ROI = (30,000 – 20,000) / (20,000) = .5 (or 50%)
In other words, you started with $20,000 and end up with $30,000 after a year, for a return of 50%.