ROI stands for Return on Investment. Many investors struggle to calculate the ROI of a flat for different property investments. Although it is challenging to calculate, ROI is the best measure to compare investments and monitor performance.
Property Apps
Very few property apps to calculate the ROI of a flat or property for investors because it is very difficult to calculate. Particularly if you intend to:
- Do many calculations to compare different investment opportunities
- Compare properties in different countries
What is ROI
Return on Investment (ROI) is property investors’ most important performance measure. It is a key metric used to evaluate the profitability of a given investment.
ROI measures the profit a property generates compared to the amount of cash you invested. It is a straightforward way to assess performance. It helps investors identify potential investments that have the highest potential for returns.
ROI is calculated by taking the total gain from an investment, subtracting the total cost of the investment, and dividing the result by the total cost of the investment.
ROI = (Gain from Investment – Cost of Investment) / Cost of Investment
Property ROI Calculator
The issue with calculating the ROI for property investors is it has little value using pre-tax figures. Therefore, for property investors a better variant of ROI is calculated using the following.
ROI = (Capital Appreciation + Net Income (after-tax) – Initial Cash Invested) / Initial Cash Invested
There are a couple of issues with this.
Net Income (after-tax)
Calculating net income (after-tax) is the total rental Income generated each year, less the costs of mortgage interest, managing the property, and income tax. The cost of tax depends on factors, such as where you live and what other income you generate.
Initial Cash Invested
The initial cash invested, typically has two components:
- Deposit – the amount required by the bank to obtain a mortgage
- Stamp duty and other purchase costs – these depend on the price of the property, where you live, and why you purchase the property (ie. investment).
What is ROI
Return on Investment (ROI) is one of the most important performance measures for property investments and is a key metric used to evaluate the profitability of a given investment. ROI measures the amount of profit generated by a property compared to the amount initially invested in it. It is a straightforward way to assess a property investment’s overall performance and helps investors easily identify investments with the highest potential for returns.
What are the different measures?
Real estate performance metrics are used to forecast the success of a real estate investment. These metrics are important for investors to keep track of their investments and assess their value.
The most common real estate performance metrics are occupancy rate, net operating Income (NOI), capitalization rate (Cap Rate), and cash flow.
Occupancy Rate
Occupancy rate is the percentage of a year that tenants occupy a property. It is a good indicator of tenant demand.
Net Operating Income
Net Operating Income (NOI) is the amount of money that a property generates after all expenses have been paid. This is important to measure because it shows how much Income the investment is generating after all costs have been taken into account.
Capitalisation rate
Capitalisation rate (Cap Rate) is a measure of the rate of return an investor can expect from an investment in real estate. It is calculated by taking the NOI and dividing it by the property’s purchase price.
Cash Flow
Cash flow is the amount of money that an investor can expect to receive from their investments. It is calculated by taking the NOI and subtracting any expenses from it.
Finally, cash flow is the amount of money that an investor can expect to receive from their investments. It is calculated by taking the NOI and subtracting any expenses from it.
These are the most common real estate performance metrics used to measure the success and progress of a real estate investment. They are important for investors and developers to keep track of their investments and assess their value.
Why is ROI a better measure
One of the main benefits of using ROI to evaluate a property investment is that it is a measure that can be used in both short-term and long-term investments. ROI can be used to evaluate a property investment’s performance over time, allowing investors to determine whether the returns generated from their investment are worth the initial investment. It is also a useful measure when comparing the performance of different investments, as it provides investors with a clear picture of the return generated from each one.
Another benefit of using ROI to evaluate a property investment is that it considers both the costs associated with the property and the Income generated from it. This allows investors to calculate the net return on investment, which takes into account both the expenses involved and the returns generated. This helps investors accurately assess their property investments’ performance and make informed decisions about whether or not to invest in a particular property.
Finally, ROI is a great performance measure for property investments because it is relatively easy to calculate. By simply dividing the total Income generated from the property by the total investment made, investors can quickly and easily calculate the ROI of their property investments. This makes it a great way to evaluate the performance of a given investment, as it allows investors to quickly and easily see how much money they are making or losing on their investments.
Overall, ROI is a great performance measure for property investments because it is simple to calculate, helps investors to compare the performance of different investments, and takes into account both the costs and Income associated with the property. This makes it an invaluable tool for investors looking to maximize their returns from their investments.
Do you want to calculate the ROI on a flat or Property?
Determining why you invest in a property before buying is an important part of your investment strategy. Equally important is calculating the likelihood of a property meeting these objectives. Calculating the ROI for a property is the best way to do this. And then comparing the ROI of different properties is key to determining the best property for you. You may like to read our guides to investing and checklists here.
Du Val Global
We built Du Val Global, real estate investment software designed to help investors make better investment decisions when they buy property. Our platform provides investors with the real estate investment tools to help with critical decision-making, including
- Research – access to powerful property analysis provides real-time market research, allowing
landlords to have a complete picture of tenant economics, prevailing
rents, and capital values - Financial Analysis – a property investment tool that investors can use to create financial models to determine net return after tax and return on investment. Investors can understand specific tax implications. Our property comparison tool allows investors to compare investments on an after-tax basis to determine the best investment for them. Investors can even compare properties in different countries
- Du Val Dynamic Pricing™ – Du Val Global offers a range of properties for sale from leading developers in Australia, New Zealand, and the United Kingdom via its proprietary Du Val Dynamic Pricing™ algorithm. This sophisticated pricing model levels the playing field for small investors through aggregation, providing discounts of between 7.5% and 15% from retail prices, which, until now, have only been available to large institutional investors.
- Portfolio Management – a property portfolio planning tool investors can use to monitor and track the performance of their investments.
Interested in giving our platform a go? Start your free trial today at Du Val Global.
