Everyone has been talking about the growth in the Real Estate Market in Cyprus and its massive profits. Return on Investment is amazing on the properties. People are investing in houses and properties in Cyprus with rewarding long-term gains. Houses and Real Estate have become assets in Northern Cyprus with the recent increase in prices and growing returns on Investment. Resultantly, the Real Estate Market in Northern Cyprus has become the most profitable industry in the country.
However, all these people have one common question; how to calculate the Return on Investment (ROI) on a property? People want to calculate the Return on Investment (ROI) on Real Estate investments so that they may get an idea of the profits of their investments. In this article, we will cover the different ways and processes of calculating the Return on Investment.
What is Return on Investment (ROI)?
Return on Investment is the annual profit that you make after investing a certain amount of money in a particular business or property. Basically, it is a relative term that depends on your Investment and your total profits on a monthly or annual basis. Return on Investment calculations are important because they can help you estimate the profit you will be making over an investment in a certain period.
The general formula to calculate the Return on Investment is the same in all cases. It’s just that you have to consider the different costs and returns in each case separately.
Return on Investment = [(Gains or Profits on your investment) / Total Costs of your investment] x 100%
You can use different formulas to calculate the total Return on Investment in different cases.
How to Calculate the ROI on Real Estate Investment?
In case you have purchased a real estate property in Cyprus and sold it later for a higher price, you can use the following very simple formula to calculate the Return on Investment.
Return on Investment = (Increased value of the Real Estate Property – Initial Price of the Real Estate Property) / Initial Price of the Real Estate Property
For example, you purchased a property for £200,000 and sold it for £250,000. The ROI will be calculated through the following process.
ROI = (250,000 – 200,000)/200,000 x 100%= 50,000/200,000 x 100%= 25%.
Thus, the Return on Investment on real estate property in the above example would be 25%.
How to Calculate ROI on a Rental Property?
In the case of a rental property, the calculation of ROI becomes different. The amount that is earned through a property in rental income is added to the gains on Investment. It is counted as the profit that you earn on your Investment.
The formula to calculate ROI on a rental property is as follows:
Annual ROI = [(Money earned through annual Rental income + Appreciated or Increased price of the property – Initial Price of the property) / Initial Price of the property] x 100%
For example, you purchased a Real Estate property for £100,000 and rented it at £2500 per month., Assuming that the property’s total price rose to £120,000 by the end of the year. In this case, the total rental income through the property would be £2500 x 12 = £30,000.
Thus, the total Return on Investment would include the appreciation in the price of the rental property, the income generated through rentals, and the initial cost of the property.
ROI of the rental Property = [( £30,000 + £120,000 – £100,000)/ £100,000] x 100% = 50%
Thus, a 50% return on value was recorded in the case of the above example of a rental property.
How to Calculate ROI on Rental Property with a Mortgage?
You can calculate Return on Investment on a rental property with a mortgage by considering the mortgage costs. The formula remains nearly the same, except that the mortgage costs are also considered.
It is better to use an example to explain the ROI calculations for houses with a mortgage.
For example, You purchased a house with a down payment of £20,000. Assuming that your monthly Mortgage was valued at £2,000 per month for 3 years.
If you sell this property for £60,000 after three years while using it as a residential property, your total ROI would be calculated as follows:
ROI = (£60,000) – {(£2,000 x 12 x 3) – 20,000} / £20,000
= 4,000 / 20,000 = 0.2 or 20%
However, since this Return is for the 3-year period, the annual Return would be only 6.33%.
How to Calculate ROI on Rental Property with a Mortgage?
On the other hand, you can also consider the case of a mortgage on a rental property. In that case, the rental earnings are added to the gained profit value. As a result, the overall Returns improve drastically.
Assuming that the monthly rent for the same property was £2500. In that case, the annual rent becomes £30,000. Considering that the house is sold for £60,000 after one year, the annual returns would be calculated as follows:
Annual return after subtracting the Mortgage Costs = (£2500 – £2000) x 12 = £8,000
ROI on Rental Property with mortgage = [60,000 + {(£2500 – £2000) x 12} – £20,000]/ £20,000
= 48,000 / 20,000
= 2.4 or 240%
Thus, a 240% return on value can be obtained on a rental property with a Mortgage.
You can use these different formulas to calculate the annual ROI on your real estate property as well
How to Calculate ROI on Properties with Maintenance Costs?
Any maintenance costs can be subtracted from the annual Return or gain in value. Thus, subtracting the maintenance costs or other expenses from the annual gains will help you calculate the ROI on your property with the same general formula.
Return on Investment = [(Gains or Profits on your investment) / Total Costs of your investment] x 100%
Conclusion:
Calculating the ROI on your properties is a smart thing to do. You can reach out to Four Vision Development for more help and support.
