Return on investment (ROI) indicates the percentage of invested money returned to an investor after the deduction of associated costs. Generally, it is also the means by which investments options, eg Shares, Bonds, Property, etc, can be compared.
Below is an example of how you can calculate the Return on Investment for a Commercial property.
Note that these figures are purely speculative. Professional advice should be sought when investing to identify the right properties to achieve maximum returns.
Example Calcluation of ROI
A hypothetical client has $2 million they wish to invest. The client is willing to debt-fund 50% of this investment. We would therefore look to purchase an investment of circa $4 million.
Assuming the investor does not wish to develop the property, we would look to target an investment with a yield of roughly 7% which would represent an annual rental income of $280,000.
With a loan of $2 million, the annual loan repayments would be circa $100,000.
Deducting the various taxes and fees associated with the investment, this would represent revenue of circa $100,000 for the client each year. If the client then decided to sell their investment in 8 years. We would expect a sale price of $8 million (on the assumption that property values typically double every 7-10 years).
The return on investment for the property would therefore represent the gain on investment which is:
$100,000 x 8 years = $800,000 plus the $4,000,000 increase in capital value.
Therefore the return on investment is: ($800,000 + $4,000,000)/ $2,000,000 = 240% return on investment (over the life of the investment)
The client will then be able to repeat the process on a higher scale with their $4.8 million available in capital for reinvestment.
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Written by Manny Galanos
Manny is a fully Licensed Estate Agent and Auctioneer with a Bachelor of Economics from Monash University. He is also an Associate of the Australian Property Institute.