Real estate investment is one of the most attractive options for those looking to generate long-term income. However, to make informed decisions, it is essential to calculate the real estate return of each asset. In this article, we'll teach you how to properly evaluate a real estate investment, so you can maximize your benefits and minimize risks.
Real estate return is basically the benefit that can be obtained from a property in relation to the cost of the investment. It is expressed as a percentage of the total investment cost and takes into account factors such as income from renting or selling, the value of the property, and maintenance costs and taxes. In short, it's an essential factor in whether an investment is worth it or not.
Calculating real estate returns helps you make better decisions and get the most out of your investment. Among its benefits, we find:
Evaluate the attractiveness of an investment: Comparing the profitability of several properties allows you to identify those that have the highest return potential.
Make informed financial decisions: Knowing real estate returns helps you decide if an investment fits your financial objectives, allowing you to better manage your assets.
Maximize your profits: By understanding the factors that influence profitability, you can improve the return on your investment, either by optimizing the property or selecting suitable tenants.
Understanding how to calculate real estate profitability is essential for making wise decisions in the market. Here are a number of key concepts:
Gross return is the percentage of income generated by a property in relation to its purchase value. To calculate it, divide the annual income earned by the purchase price of the property, and then multiply the result by 100 to obtain the percentage. While this calculation provides a quick view of performance, it doesn't consider the additional expenses associated with the property.
Net return, on the other hand, is more accurate because it takes into account both income and expenses associated with the property, such as maintenance, taxes and insurance. To calculate it, you must subtract the annual expenses from the income earned and then divide the result by the purchase price. As in the previous case, it is multiplied by 100 to obtain the percentage, thus providing a clearer view of the real benefits.
In addition to gross and net returns, there are other indicators that can help you evaluate the return on a real estate investment.
ROI is a financial indicator that measures the total return on an investment compared to the initial investment. To calculate it, the total income generated by the property is taken and compared to the amount originally invested. Although this method provides an overview of performance, it doesn't always include the details of associated expenses, so it's not as accurate as net return, but it's still useful for getting a quick idea of the return.
The MOIC (Multiple on Invested Capital), or Multiple on Invested Capital, is a metric that tells you how many times you have recovered your initial investment. It's calculated by dividing the total amount received by the capital you originally invested. The result is a number that reflects how many times your investment has grown, making it a useful tool for evaluating the long-term success of a real estate investment.
The NPV (Net Present Value), also known as NPV (Net Present Value), is a financial metric that helps you evaluate the return on an investment considering the value of money over time. To calculate the NPV, the difference is taken between the present value of the future cash flows generated by the investment and the value of the initial investment.
This tool converts future cash flows (income) to present value using a discount rate, which is usually the cost of capital or an expected rate of return. Finally, the initial investment is subtracted to determine if the investment is profitable. If the NPV is positive, it means that the investment is viable and can generate long-term benefits.
The IRR (Internal Rate of Return) is another key metric for evaluating real estate profitability. This indicator calculates the discount rate that makes the NPV (Net Present Value) of an investment equal to zero. In other words, the IRR tells you the rate of return you can expect on an investment if all future cash flows are discounted to the present.
If the IRR is greater than the cost of capital or the expected rate of return, the investment is profitable. This calculation is very useful for comparing different real estate investments and making more informed decisions.
To determine if a real estate investment is really good, it is essential to know what the minimum expected return should be. According to the Banco de España, an acceptable investment should generate a net return of between 4% and 7%.
Although reaching this figure may seem complicated, at Tokenized Green we help you maximize the chances that the real estate return on your investment will be positive and profitable. With our experience and innovative tools, you can manage your investments more efficiently and ensure an attractive return. Visit us at Tokenized Green to discover how we can advise you on your real estate investments.
