Are you interested in buying an office building as an investment, and planning to rent it out as a means of earning income? Investing in rental properties is a smart way to diversity your asset portfolio and increase your future wealth. It’s also a good way to boost your current cash flow, as you collect monthly rent payments from tenants.

Of course, knowing how to accurately calculate the ROI on your office building property is an essential component of smart investing. Below, we dive into everything you need to know about calculating the ROI of your investment property.

Understanding ROI

A “return on investment” measures how much profit is earned from an investment, given the cost of acquiring that investment. This metric can be used to evaluate the performance and effectiveness of an investment overall, or in comparison to other investments.

Here is a simple formula for determining the ROI of an office building you have purchased:

ROI = (Gain from Investment – Cost of Investment) ÷ Cost of Investment

For the sake of easy math, let’s say you acquire a property for $100,000. Years later, you sell the property for $150,000. Using our formula from above, we get:

($150,000 – $100,000) ÷ $100,000 = 0.5, or 50%. So in this scenario, the rate of return on your investment is 50%.

Calculating ROI of Investment Properties

Unfortunately, calculating the ROI of a rental property is usually not this simple. Often, there are other factors to be considered. For example, did you purchased the property in cash, or did you take out a mortgage? 

If you financed the property, you’ll need to account for both the down payment and your mortgage payments. To figure an accurate ROI, you should also factor in variables such as repair and maintenance costs, as well as ongoing operating expenses. Likewise, any earnings (such as rental income) should be factored into your ROI as well.

First, let’s consider a property purchased with cash.

Using the same example from above:

• You purchase an office building for $100,000.
• You spend a total of $12,000 on closing costs and upfront remodeling costs, bringing your total investment cost to $112,000.
• You spend $3,000 per year on utilities, property taxes, insurance and maintenance.
• Each month, you collect $1,300 in rent from your tenants. This adds up to $15,600 over the course of a year.

To calculate your annual return, subtract your annual expenses from your annual gain. In this case, that comes to $15,600 – $3,000 = $12,600.

Then, it’s time to calculate the ROI of your property. To do this, divide your annual return ($12,600) by your total investment cost ($112,000). This gives us 0.1125, or 11.25% ROI.

Next, let’s consider a financed property.

Continuing with the same example:

• You purchase an office building for $100,000. Instead of paying cash, you take out a mortgage. The down payment for this purchase is $20,000.
• You spend a total of $15,000 on closing costs and upfront remodeling costs, bringing your total upfront investment costs to $35,000.
• You spend $4,800 per year on your mortgage, and the same $3,000 per year on utilities, property taxes, insurance and maintenance.
• Each month, you collect $1,300 in rent from your tenants. This adds up to $15,600 over the course of a year.

To calculate your annual return, subtract your annual expenses from your annual gain. In this case, that comes to $15,600 – ($4,800 + $3,000) = $7,800.

Then, it’s time to calculate the ROI of your property. To do this, divide your annual return ($7,800) by your total upfront expenses ($35,000). This gives us 0.2228, or 22.28%.

Keep in mind, all of the above examples are very simplified scenarios. When purchasing an office building to rent out, you are likely to encounter other variables like tenant vacancy, unexpected repairs and renovations, or changes in monthly utility costs.

CRESCO’s investment property team can help you choose the right office building for your goals, in order to maximize your ROI. Contact us today!