Real estate properties are quality investment assets that generate a steady stream of passive income. Unlike other ventures, real estate properties offer opportunities for a monthly cash flow with value appreciation to boot.
However, buying and owning a property doesn’t immediately guarantee you’ll earn back what you spent and turn a profit. As a property owner, there are a few things you can do to maximize your earnings and improve your return on investment (ROI).
First, let’s discuss what ROI means in real estate investing.
What is ROI in Real Estate?
Return on investment (ROI) is a financial metric that assesses the profitability of your real estate investment based on its cost. It helps determine if a potential asset is worth the time, effort, and capital you’re considering. As an investor, understanding your ROI plays a crucial part in earning and maximizing profit.
Moreover, it helps you compare the performance of different investments and choose what provides the highest returns for the same level of risk.
How to Calculate ROI for Real Estate
If you’re planning to invest in a condo or a house and lot, you need to know how to calculate your ROI. Different calculating strategies offer benefits in determining real estate ROI, but two of these are the most popular methods among investors.
1. Cost method
Under the cost method, you can determine your real estate ROI by dividing the net property income or gain by the original investment cost. Most turn to this method because it’s easy to apply without accounting knowledge.
Say you bought a real estate property worth PHP 1 million, spent PHP 500,000 for upgrades, and sold it for PHP 2 million. The first thing you must do is calculate your property equity. Since you sold it for PHP 2 million with a purchase price of PHP 1.5 million—including renovations—your equity is PHP 500,000.
You then divide the total price, PHP 1.5 million, against your equity. Your ROI totals roughly 33%. This figure is a significant gain, considering the ideal revenue is 20% or more.
2. Out-of-pocket method
The out-of-pocket method divides your current equity by the current property market value. Let’s use the figures above to understand this method better. You bought the property for PHP 1 million, but this time you made a downpayment of 30% and used a mortgage loan to pay off the rest.
Your out-of-pocket expenses—the combined price of the downpayment (PHP 300,000) and repair costs (PHP 500,000)—total PHP 800,000. Since you sold the property for PHP 2 million, you’ll have PHP 1.2 million in equity. If you divide your equity against the sale price, your ROI totals about 60%.
This calculation method is ideal if you use a mortgage to acquire real estate investments.
3 Ways to Increase the ROI of Your Real Estate Investments
You can implement actionable ways to increase your property’s ROI and maximize earnings.
1. Invest in strategic renovations
You might think renovating a property you’ll sell later may be counterintuitive. However, it’s an excellent way to increase your property’s market value.
It’s ideal to strategically plan your renovations by including top features modern homebuyers look for. Some examples are SMART functionalities, ample storage space, and energy efficiency features, to name a few.
This renovation strategy can boost your chances of securing buyers or renters, thus contributing to your property’s ROI.
2. Improve the curb appeal
Curb appeal refers to the overall attractiveness of a property, including its exterior appearance, landscaping, and maintenance. That’s because a high curb appeal can increase property value.
Giving the property a fresh coat of paint, trimming greenery, and replacing chipped doors—these simple projects can make your property more enticing to prospective tenants.
3. Choose between an RFO and a pre-selling property
Both ready-for-occupancy (RFO) and pre-selling properties make suitable investments.
Generally, RFO properties offer the advantage of immediate income generation since the property turnover is immediate upon purchase. So, you can either put the place on rental or renovate it to prepare for reselling.
On the other hand, you can take advantage of pre-selling properties that offer low selling rates. You can potentially sell the property for a higher price once it’s complete. Another option is to hold on to the asset and sell it once the value appreciates.
Deciding between an RFO and a pre-selling property will ultimately depend on whether you want immediate gains from your investment or long-term benefits.
The Real Value of Understanding Real Estate ROI
Real estate remains one of the safest and most secure investments you can make, holding its value even during recessions. While some may be happy to get minimum earnings from this asset, you can maximize your profits when you understand ROI.
ROI in real estate is crucial when determining the best strategies to increase revenue and earn a profit.
You can have an RFO condo in Manila from Federal Land. As one of the Philippines’ leading real estate developers, they offer well-built and thoughtfully designed pre-selling and RFO condos in prime spots with high investment potential.
For inquiries, contact them today!
