How to work out the return on an investment
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