The ROI in a real estate investment

When buying property abroad, the two most important factors are the yield and the capital growth. This applies to buy-to-rent transactions as well as to dry sales.

In other words, when dealing with real estate experts such as Remida, it is crucial to understand from the outset what the real estate ROI will be, i.e. the Return of Investment on a property.

However, the ROI can also be calculated independently, once the necessary data about the characteristics of the property to be taken over and the conditions under which the transaction will take place (apartment building, property rental, property flipping) have been acquired. This allows the investor to get a clearer picture of the investment even before it takes place.

The consultation phases with the Remida team allow this aspect to be explored in depth, but it is worth drawing some guidelines in the following lines.

Property yield: gross and net

The yield on a property is basically the economic share of the return to which the person who financed the purchase of the property is entitled, which can be either a rent or a capital gain (the positive difference between purchase and resale) once the property is sold.

This yield may be net or gross, depending on the parameters we decide to take into account in the calculation.

The gross yield is, for example, the percentage generated by comparing the purchase price of a property with the annual rent. In this case, however, we do not take into account the ancillary costs, which are independent of the cost of acquiring the house, and which belong to the net yield.

The net return is, in fact, the same percentage obtained by comparing the purchase price and the annual rent, but also taking into account expenses such as maintenance, interest rates (in the case of a mortgage), legal and bureaucratic expenses, etc.

    roi body calculation

    Return on investment calculation

    The return on investment of a real estate transaction is calculated on the basis of the net return, i.e. taking into account all the other real estate-related expenses that the investor will have to pay to finalise the transaction.

    This makes it possible to obtain a figure that is as reliable and “clean” as possible, i.e. close to the real margin that can be obtained through a successful real estate operation.

    To calculate the ROI, the annual profit of a property must be divided by the purchase price of the property. The annual profit, as mentioned, is the result of the annual amount of the rent minus all expenses.

    Practical example: purchase of a property without a mortgage and subsequent income generation.

    Let us imagine that we acquire a property for € 200,000, with an annual rent of  € 20,000. From this figure we subtract € 5,000 in annual expenses such as ordinary maintenance or taxes. The annual profit would then be 15,000.

    ROI = Annual profit / Purchase price, so € 15,000/ € 200,000 = 7.5%.

    In the case of a purchase with a mortgage, the annual expenses will be higher, because they will take into account the instalments, but the net investment will be lower and therefore the ROI percentage could easily be higher.

    The return on investment is also the same in the case of purchase for resale. Clearly, the following parameters must be calculated in this case:

    • Purchase price
    • Restructuring expenses
    • Incidental expenses
    • Resale price

    The capital gain will therefore be the difference between the initial capital invested and the capital obtained on resale, net of all expenses incurred in financing the operation.

    RESULTS

    LET THE NUMBERS SPEAK FOR THEMSELVES

    AVERAGE ANNUAL YIELD FLIP PROPERTY

    AVERAGE DURATION OF REAL ESTATE TRANSACTIONS

    NET ANNUAL EFFECTIVE YIELD RENTAL PROPERTY

    PROFITABLY MANAGED OPERATIONS SINCE 2011

    TOTAL VALUE OF TRANSACTIONS SINCE 2011

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    Q

     

    Proprietà che richiedono un lavoro di rinnovamento e/o di ristrutturazione sostanziale; da questi aggiornamenti possiamo massimizzare il capitale/valore delle proprietà

    sottoperformanti con sfide legate al mercato e/o alla gestione

    Opportunità off-market e opportunità dirette al venditore che possono essere negoziate direttamente con i proprietari

    Proprietà che richiedono un lavoro di rinnovamento e/o di ristrutturazione sostanziale; da questi aggiornamenti possiamo massimizzare il capitale/valore delle proprietà

    sottoperformanti con sfide legate al mercato e/o alla gestione

    Opportunità off-market e opportunità dirette al venditore che possono essere negoziate direttamente con i proprietari

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