Achieving a good return on investment depends on several factors, chief among them the quality of the assets in your investment portfolio.
The first step towards a good return is the selection of your assets. Based on their historical performance, many investors turn to real estate assets for a good return on investment.
Find out what a good return on investment on real estate assets looks like, so you can acquire the quality assets that build a better portfolio.
What Is a Return on Assets?
Of all the financial metrics investors use to assess an asset’s quality and performance, return on assets is the most straightforward—and arguably the most important.
Return on assets (ROA) is the final profit made by the assets constituting an investment strategy. ROA calculations give investors a complete overview of their assets’ performance in the most important metric: how much money it has earned.
Return on assets provides this view because it accounts for the total costs that have gone into the investment over the duration it is held. Finding the profit generated by an asset is a helpful indication it is performing well. Still, ROA gives a fuller picture of how total assets held have fared by including more context.
ROA is a fixture of any real estate investment strategy. It is a necessary part of any comprehensive assessment of a portfolio’s performance because it lets an investor know how well it is doing.
A good ROA is one of the strongest indications that investors are on the right track with their investments.
ROA is a standard financial performance metric used to analyze a company’s assets over a set period of time. Other financial ratios, with similar acronyms, include return on equity (ROE), which measures a company’s net income divided by its shareholder’s equity to paint a picture of a company’s profitability for a given period.
Different companies use different metrics in different industries. Still, ROA, ROE, and return on investment (ROI) are all commonly used calculations used to measure the success of particular products or an overall company’s performance.
How Is ROA Calculated on a Real Estate Portfolio?
A company’s ROA is represented as a percentage of the total assets held in its portfolio; this is the specific context that keys investors into its actual performance concerning net income accrued by their total assets. The return on assets formula is net income divided by total assets.
Lower ROAs, in the ROA formula, can result from lower income statements or a more significant figure for a company’s total assets. Conversely, a lower figure for average total assets or a higher net income results in a higher ROA.
To calculate ROA, investors need to find two factors: the net income of their portfolio and the total value of their assets.
Net income is the final balance sheet measurement of money a real estate investment portfolio brings in.
Real estate presents investors with a range of opportunities to generate a return, like rental income generated by leasing out properties or selling their property after its value has sufficiently appreciated. Real estate can have many operating expenses that can also mitigate the net income, lowering the overall profit margin.
The total costs of the assets can refer to many expenses attached to the asset: the sales price upon buying, closing fees, maintenance costs, insurance payments, and beyond. The more complete the total costs of the assets are in the final assets calculation, the more accurate the final ROA can be.
All told, investors can see how the capital they spend on their assets fares concerning the revenue they bring in by calculating their portfolio’s ROA. The stronger each asset’s return, the better the ROA can be.
How Does Real Estate Generate a Return?
Investors value real estate assets because of their versatility; average assets in real estate can generate a return in a few ways. How a property can create a return informs the asset’s total return on investment. How you earn a return with real estate can inform the quality of your return.
Here are some examples of real estate assets that can increase their value, earn an income, and generate a better return for investors:
- Appreciation
- Rental Income
- Repairs and Renovations
Appreciation
Perhaps the most attractive feature of real estate as an asset class is its robust rate of appreciation. Appreciation describes an asset’s growth in value over time. Real estate is well-known for its high appreciation rates, meaning investors that hold onto their assets long enough are almost guaranteed to net a positive return.
Since the 1960s, the value of property has increased virtually without fail. Because the return on investment is a measurement of net profits that factors in an asset’s current value, the reliable appreciation of property inherently strengthens its potential ROI. High appreciably real estate makes for a better return on investment.
Rental Income
Most real estate investors earn an income on their assets by renting them out to tenants. Rental income can provide property owners with a strong cash flow stream that extracts more value from their assets beyond letting them appreciate over time.
Rental income is almost always going to net investors a positive ROI. Property owners are in an advantageous position when setting monthly rent to ensure that the established rate covers their outgoing expenses. Rent can be actively calculated to generate a strong ROI. The level of control rental properties give to an investor’s ROI makes real estate a compelling investment.
Repairs & Renovations
Investors can take a direct role in their asset’s value through repairs and renovation. Real estate has unique properties that distinguish it from other asset classes; chief among them is the improvability of real estate. As tangible, physical properties, real estate assets possess the potential for value-add improvements.
Repairs made on an asset and renovations of existing structures at every level can substantially boost the appreciation of an asset. The improvability of real estate helps investors take more control over their ROI. By taking charge of your property value through repairs and renovations, you can actively improve its ROI.
What Is a Good Return on Assets for Real Estate?
The return potential of real estate assets is clear; knowing the range of good returns for real estate investment portfolios helps investors curate their assets for success.
Good ROAs operate at 5%, while higher ROAs operate at over 20%. Portfolios with high ROAs within that range or above it indicate investors are on the right track.
Because investors can take an active role in the returns produced by their property, even properties with comparatively mediocre ROIs still possess the potential for an explosive return and improve a portfolio’s return on assets ratio.
The real estate investment strategy phenomenon of house flipping demonstrates how investors can take undervalued properties and maximize their potential return.
What Types of Real Estate Investments Should You Consider?
Getting the best possible return on your real estate assets depends on the types of real estate you add to your portfolio. Investors can choose a wide range of property types in real estate. Finding the right asset for your portfolio is a matter of selecting the right property type at the right moment and can help avoid low ROA.
Here are a few property types investors should consider to secure their personal finances and widen their range of opportunities:
- Residential Real Estate
- Commercial Real Estate
- Industrial Real Estate
Residential Real Estate
Residential real estate refers to zoned properties designed for housing purposes. Residential properties for investment include single-family homes, multi-family homes, and condos.
Commercial Real Estate
Commercial real estate properties are used by businesses to generate income. There are many different subsets of commercial real estate, including retail storefronts, office space, restaurants, and apartment buildings.
Industrial Real Estate
Industrial real estate is properties utilized by businesses for several purposes: production, supply and distribution, and development. Industrial real estate may refer to warehouses, laboratories, storage facilities, or factories.
The Bottom Line: Strong Real Estate Assets Make a Strong ROA
There’s a reason real estate is an excellent asset class that many investors favor in profitability ratios; it presents many ways to make a return and is well-known for its ROI performance.
Real estate is a premium asset that can go for a premium price. To ensure you have the capital to acquire quality real estate assets and improve your portfolio’s ROA, you need favorable financing options for a better return.
