HOW TO CALCULATE ROI FOR REAL ESTATE INVESTMENTS
ROI simply means Return on Investment.
The goal of every investment is to make profit (returns). And as an investor, it is important that you know how to calculate the returns on your investment, in order to be able to determine the profitability of a property.
There are different ways to calculate the returns on a property investment, and we’ll be exploring them in this post.
The first method involves calculating the duration required to recover all incurred costs, including the cost of the acquisition of the property.
For example, if the cost of acquiring a property sums up at 90 Million Naira, and the property generates an annual rental income of 9 Million Naira, it’ll take a total period of ten (10) years to recover the capital investment.
ROI is usually calculated in percentages.
That is, the percent of returns generated in relation to the capital value of the property.
Going by the existing example above, a 100% return on investment for a 90million Naira property will only be possible in a minimum of ten years – going by the assumption that no additional costs (e.g maintenance costs, etc.) are incurred within the said period of time.
However, in situations where additional costs are incurred (excluding the capital investment on the property), the additional costs will be added to the total value of the property and the percentage will be calculated in relation to the new sum.
Take for example, Mr. A acquires a property for 90 Million Naira, and he spends about 10 Million Naira on renovations – bringing the total sum to 100 Million Naira. The returns (either via rental income or otherwise) will be calculated in percentage of the new total sum which is 100 Million Naira.
It is also possible to calculate the returns on a property annually.
For instance, if the purchase value of a property is 50 Million Naira, and the property generates an annual rental income of 2.5 Million Naira. We can conclude that the annual ROI for such property is 5%.
In a situation whereby the property appreciates by 10% annually while still generating an annual rental income of 2.5Million Naira, the annual ROI for such property will be 15%.
Investments in real estate remain one of the most profitable kinds of investments on earth, as you can generate cash flow through rental income while benefiting from long term capital appreciation.
As a rule of thumb, it is believed that a good investment in real estate would require a maximum of 20 years to recover the capital investment – either via rental income or otherwise.
Nonetheless, experts have discovered newer investment methods that allow investors to recover their capital investment within a period of 7 years or less.
Would you like to take advantage of this opportunity?
Our investment advisors are willing and available to guide you through your next investment journey, to ensure that you make a profitable investment without leaving money on the table.