How to calculate the return on investment (ROI) in the real estate sector?
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How to calculate the return on investment (ROI) in the real estate sector?

Posted By Featured Featured     June 5, 2021    

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In this article you will find:

  • What is ROI?
  • The advantages of investing in real estate
  • Why is ROI important to the real estate market?

To choose an investment well, it is necessary to analyze it from the point of view of various indicators and metrics. One of them is the calculation of the return on investment or ROI (return on investment), in the acronym in English. 

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It is the ROI that will help you understand how profitable this investment can be. Understand how to calculate it in this blog post!

WHAT IS ROI (RETURN ON INVESTMENT)?

The return on investment, or even return on investment, is a very popular metric in the financial area to discover the profit margin of a certain business. 

To be calculated, you need two values: 

  • Total Amount Invested 
  • Return on investment

The formula for obtaining this rate of return on investment is quite simple:

Return on investment (ROI) = (Return - Total amount invested) / Total amount invested

By multiplying the resulting ROI by 100, you get the result as a percentage .

When the ROI is positive, there was a profit. When it is negative, there was a loss.

In the case of purchase and sale of real estate, the total amount invested must include all taxes and fees paid for its acquisition (ITBI, notary costs, etc.), as well as the price of renovations and improvements and maintenance costs (condominium, IPTU, etc.) in the absence of tenants. 

The return can come in the form of rental income or through the sale of the asset. 

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ROI OF SELLING PROPERTY

Let's take a practical example: suppose you bought an apartment for R $ 800 thousand. Taking into account that acquisition costs are about 4% of the property (R $ 32 thousand), then the amount invested already rises to R $ 832 thousand.

There they offer you R $ 950 thousand for the property, which means that the ROI is:

ROI = (950,000 - 832,000) / 832,000

ROI = 0.14

Multiply 0.14 by 100 and that's it: it becomes 14% profit!

PROPERTY RENTAL ROI

How to calculate return on investment for rented properties is a little different, but not much: instead of discovering the final return on investment (after all, the sale only happens once), you discover the monthly return on investment. 

The formula for return on investment for real estate rent looks like this:

ROI = (Monthly rent amount / Total amount invested) x 100

Since there is a multiplier of 100 at the end, the rate of return on investment will already be a percentage. 

Using the same apartment of R $ 832 thousand, we will apply a hypothetical rent of R $ 3,500 per month. I.e:

ROI = (3,500 / 832,000) x 100 

ROI = 0.42% per month 

By multiplying 0.42% by 12, you would have a return on investment of 5.04% per year.

It is worth remembering that, as the owner of the property, you would be responsible for costs of repairs and structural improvements, as well as maintenance costs (IPTU and condominium etc.) when there is no renter!

Also read: Real estate marketing: Learn how to put it into practice!

THE ADVANTAGES OF INVESTING IN REAL ESTATE

Many financially able Brazilians buy real estate because they consider real estate investments to be safer, especially in times of economic volatility.

This diversification of investments also strengthens the protection of its portfolio and, by increasing its net equity, facilitates negotiations with the main financial institutions.

As the return on investment calculation shows - which must always be done on a case-by-case basis, investing in real estate can offer a higher yield than other conventional financial products and / or extra income, in the case of rents.

There is also the issue of property valuation. When evaluating in depth the growth opportunities of a certain area of ​​the city, for example, it is possible to find a great deal in the medium or long term.  

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HOW IMPORTANT IS ROI FOR THE REAL ESTATE SECTOR?

The return on investment is just as important in the real estate sector as in any other sector, since the essence of the investment does not change : entering with a sum in some business (stock, fund, property, etc.) aiming at a positive return.

In this market, the return on investment can have very different terms. A construction company that is going to build a new mall, for example, needs a horizon of several years before it can profit. 

Meanwhile, an investor in real estate funds specializing in shopping malls may think of less time, depending on their strategy - especially if that same market is heated, for example. 

The investing buyer can think of different horizons. You may be buying that property to diversify your assets and protect it from fluctuations or to rent the property and have a new fixed income.


As you can see, the universe of investments is vast and full of possibilities! Want to know more? 
Download our free ebook: To invest or to live: how to choose the right apartment for every occasion.

 

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