Calculate profitability in real estate investment
April 9th, 2021 |
Today, as in all times, people have wanted material goods, including a home. Therefore, in this post we want to encourage you to invest your savings and know how to do it well, learning to calculate the profitability of a real estate investment, which will give you stability if you want to enter the business world.
If you buy a property with the purpose of renting it, it is a wise investment that will ensure a constant flow of income.
What is the profitability of a property and how is it calculated
It is the relationship between the profits obtained and your investment. The percentages that show you if what you invested has been recovered and there are extra profits, are essential for you to know how to measure the economic benefits that result from your property rental business, be it annual or vacational.
We invite you to learn how to calculate the gross, net and PER profitability so that your investment is a total success.
You must know two things exactly:
- What is the cost of the property.
- The annual income that this property will bring you.
– Formula: RB = Monthly rental price X 12 months / property cost x 100.
- Purchase price = €250,000.
- Gross Income 1,000 € x 12 months = 12,000 €
- Gross Profitability = 12 %
Formula: Sum of fixed expenses X 12 months.
(RN = Gross profitability – current expenses)
In addition to the cost of the property and the annual income, you must know all the fixed expenses that it requires annually, which must be subtracted from the income. Let’s see below how you should calculate this operation with hypothetical numbers of fixed expenses that you would make each month:
Community owners: 50 € + IBI: 40 € + Management Fees: 50€ + Home insurance: 30 € + provision of repairs: 20 € = 190 €.
- Purchase Price: €2500,000.
- Gross Income 1,000 € x 12 = 12,000 €.
- Rental expenses 190 x 12 = 2,280 €.
- Net Income: €9,720.
- Net Profitability: 9,7%.
Difference between gross and net profitability
As you have observed in the examples, the gross profit is the result of subtracting the cost of them from the total sales.
In net profit, taxes, interest, fixed expenses and other costs are subtracted from total income.
What are fixed expenses
They are those types of expenses that you cannot forget when making your calculations of the profitability of your property, because you will not intend to go at a loss because you do not have the necessary provisions.
Knowing these costs gives you a projection of expenses and even allows you to make adjustments in the price that you will stipulate in the rent, before closing a contract with your client.
Some of the fixed expenses are as follows:
- Community expenses.
- Garbage rate.
- Home insurance.
- Maintenance expenses.
- Services and extras.
What is and how is the PER calculated?
PER is a ratio that is used in the stock market. If you enter the world of real estate investment, it is essential that you know how to make the projection that your investment will have over time, that is, how long it will take to recover what you have invested in the property.
PER = Cost of the property / Gross income.
- Purchase price = €250,000.
- Gross income 1.000 € x 12 months = 12,000 €.
- PER = 20.8 years to recover your investment.
Income according to annual rent
You must know what are the management expenses and the tax treatment that weigh on the property, but mainly the fixed expenses that it requires. In the previous examples you have seen how to perform your annual calculations and thus know what is the real income you will get when renting in this way.
Income according to vacation rental
If you consider entering the tourist housing market to make your savings and investments profitable, you should know if it is more profitable than making an annual rental.
You should only consider among the fixed expenses, in addition to those indicated for an annual rental, other items such as:
- Furnish the flat.
- Laundry washing.
- Continuous advertising price.
- Fixes and improvements.
- Everything you need so that your property is always an attractive option for your potential clients.
During the periods of time in which your property is not rented, you must pay taxes for the imputation of real estate income in the same way.
Calculate income in both cases
For both an annual rental and one dedicated to tourism, you must use the net profitability model that we have explained previously:
RN = Gross profitability – fixed expenses.
Before making your investment, visit several real estate agencies and select the most reliable one. Some offer a wide range of possibilities for you to choose according to your investment project: for example, buying a property in an urban area or one near the beach or mountains, with a view to tourism.
Learn to calculate the profitability of a real estate investment and analyze what works best for you: an apartment for annual or vacation rental.
Article by Vanesa Mena, Apr 09, 2021
Apartment, Albatross Hill, Marbella