We consider it important that you calculate the return on investment of your real estate investments.
Miami is the gateway to the United States for Latin Americans and, as an investment destination, has grown in recent years (Portafolio, 2020). The real estate sector has strengthened after the crisis of 2008, attracting a lot of investment. Latinos are looking for opportunities to buy businesses and real estate in the United States (Forbes, 2020).
Some ways to invest in real estate are:
- Buy and sell real estate: the profitability is in the valuation of the property minus expenses. Miami homes for sale are an excellent example of this real estate investment model.
- Leasing: increases liquidity to the investment, while it is valued. The Miami homes linked to Airbnb in Miami are a good example of this model.
- Crowdlending: funds are raised with small investors to sell it to a third party. Many real estate projects are located in this model.
We want to tell you below, how to calculate the return on investment in real estate.
How to calculate return on investment in real estate?
In general, return on investment measures the profits of an investment against its cost (Muñoz, 2020). Real estate is an investment that does not generate much immediate liquidity, but it appreciates a lot (Forbes, 2020).
The general formula is:
ROI = (Current value of the property – initial value of the property) / initial value of the property.
This value, which is a percentage, indicates how much the capital invested in the property increased during the time evaluated. It is a widely used metric to evaluate the return on invested capital.
When investing in real estate, the main objective is to protect the capital invested, with the security of the property or with the valuation (BBVA, 2019). Below, we explain the factors that influence the return on investment.
What factors influence the profitability of real estate investments?
Real estate investments are characterized by relatively favorable risk and low liquidity. In addition, they offer a moderate ease to enter and withdraw from the investment. The following factors affect the return on real estate investment (Ricardo, n.d.):
- Location: the most influential factor in defining the profitability of real estate. The proximity of services, areas of influence, projection of the sector, security and state of the neighborhood are variables to consider.
- Value of property: influences the cost of insurance, taxes and registration costs. Many properties may have high upfront costs that are offset by the final valuation.
- Purpose of the investment: Here is the profile of the investor to determine the return on investment in real estate. The time you want to stay with the property, as well as the risk you want to assume, affect the valuation, the market may not react according to your expectations.
- Expected cash flows and profits: Sometimes goods are not rented at the expected time, downtime affects profitability. Other times, valuation is affected by unexpected events that distort the image of the sector, decreasing its value.
- Projection of the sector: it is important to know the vocation of the sector when deciding to invest in real estate. If an unknown project appears and affects the landscape of the property, its value may be affected.
- Indirect investments: many properties require post-purchase adjustments, which increase the initial value and decrease their final value.
Having the advice of a professional when investing in homes for sale in Miami, allows you to project the return on investment with greater solidity and confidence.
Why is it important to calculate return on investment in real estate?
Knowing the return on investment when investing in real estate is important because (Fernández, 2014):
- The return generated by the invested capital is a measure of the success of the investment.
- The investor profile also facilitates the decision when investing. It may happen that the property is likely to be valued but not the time that the investor waits.
- Real estate that requires adjustments and improvements, affect the profitability of capital, and only by measuring it, it is discovered how efficient the investment was.
- Many investors fall in love with a project because of the affinity it generates. But this can distort your perception of profitability, and only by measuring are the real benefits of the property known.
- When measuring the return on investment of the property, the investor is encouraged to consider other factors that may affect their decision on whether to sell or stay longer with the real estate investment.
Many investors are clear about the horizon of their investments, as well as their risk profile. However, not everyone is so professional. For them you have the best professional group willing to help you obtain the highest return on your investment. Calculating the return on investment is a simple task that every investor must do when putting their capital in real estate.