How to work out the re­turn on an in­vest­ment

The Citizen (KZN) - - BUSINESS - Craig Hutchi­son How to cal­cu­late ROI

Own­ing prop­er­ties can pro­vide in­vestors with steady ren­tal in­come or cap­i­tal ap­pre­ci­a­tion when the prop­erty is sold for a profit.

How­ever, it’s im­por­tant to mea­sure the re­turn on in­vest­ment (ROI) to de­ter­mine the prop­erty’s level of prof­itabil­ity.

Be­fore in­vest­ing in a ren­tal prop­erty, there are key fac­tors to take into ac­count. Lo­ca­tion and the fu­ture of the lo­ca­tion is the first and fore­most as­pect to con­sider.

Do your home­work on the area and the types of prop­er­ties in de­mand. It makes sense to in­vest in a two-bed­room unit in­stead of a three-bed­room house if the de­mand for the former is greater.

Look at a five-year view to in­vest as a min­i­mum time­frame. Ten years is prefer­able. This will gen­er­ate a more valu­able ROI, as this should give the best cap­i­tal ap­pre­ci­a­tion.

A ren­tal prop­erty’s ROI is dif­fer­ent, de­pend­ing on whether it’s fi­nanced via a home loan or paid.

Also, bear in mind cer­tain vari­ables such as if the prop­erty is va­cant and there’s no ren­tal in­come for a num­ber of months.

As­sume a prop­erty costs R1 mil­lion and monthly rent col­lec­tion is R10 000 (R120 000 for a year). Added costs, in­clud­ing con­veyanc­ing fees, bond ini­ti­a­tion costs, the deeds of­fice fee etc amount to R30 000. Thus the to­tal cost is R1.03 mil­lion. Cap­i­tal ap­pre­ci­a­tion af­ter sell­ing costs is 3% to R30 900 (R1 060 900 – R1 030 000).

Craig Hutchi­son is CEO of En­gel & Völk­ers South­ern Africa

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