How to calculate a home’s profitability
Conducting a return on investment calculation helps homeowners evaluate how much income the property can generate in comparison to the costs of owning it.
Calculating the home’s potential to generate a profit will provide a clear picture of how well a property is performing as an investment, helping you decide whether it’s worth holding onto, selling, or upgrading.
Explaining it in simple terms, Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa says that conducting a return on investment calculation helps homeowners evaluate how much income the property can generate in comparison to the costs of owning it. “This is an important calculation to conduct if you plan on using the property to generate rental income, either now or in the distant future,” he notes.
The first thing to do is to determine your total investment cost. “Start by adding up all expenses related to the property. This includes the purchase price, transfer fees, bond registration costs, and any renovations or repairs done before you start renting it out,” says Goslett.
Next, you need to find out what you can charge in rent – a local real estate professional will be able to assist you here. “Once you know what you can charge in rent, multiply the monthly rental income by 12 to determine the total income for the year. For those who already have a tenant in place, if the property was not fully tenanted throughout the year, adjust this figure accordingly,” says Goslett.
You then need to account for ongoing costs, such as rates and taxes, insurance, property management fees, and maintenance expenses. Subtract these from the annual rental income to get your net rental income. To get an ROI percentage, divide your net rental income by your total investment cost and multiplying the result by 100.
Example: Let’s assume you purchase a property for R1,500,000, spend R50,000 on renovations, and incur R75,000 in transfer and bond costs. Your total investment cost is R1,625,000. If the monthly rental income is R12,000, the annual income is R144,000. After deducting annual expenses of R24,000, your net rental income is R120,000. Using the formula: ROI = (120,000 / 1,625,000) x 100 = 7.4%. This means your investment generates a 7.4% annual return.
“You typically want the ROI to be higher than inflation. A strong ROI indicates a profitable investment, while a low ROI might signal the need for adjustments, such as increasing rental rates or reducing expenses,” Goslett explains.
While ROI is a valuable metric, Goslett also highlights the importance of considering other factors, such as property appreciation, market trends, and the economic climate. “It is always advisable to conduct regular research by consulting with your local property professional to ensure your investment strategy remains on track,” he concludes.
Writer: Kayla Ferguson
