What is Return on Investment (ROI) and Rental Yield?
Return on Investment (ROI)
Return on Investment (ROI) in property / real estate measures the profitability of an investment property. It represents the percentage return on the money invested in the property. To calculate ROI, you can use the following formula:
Where:
Net Profit is the total income from the property (e.g., rental income, appreciation) minus all expenses (e.g., mortgage payments, property taxes, maintenance, insurance).
Total Investment is the amount of money invested in purchasing and improving the property.
Rental Yield
Rental yield is a metric used to evaluate the potential return on a rental property. It measures the annual rental income as a percentage of the property's value. There are two types of rental yield: gross rental yield and net rental yield.
Gross Rental Yield
Gross rental yield is calculated before accounting for any expenses. The formula is:
Where:
Annual Rental Income is the total rent received in a year.
Property Value is the current market value of the property.
Net Rental Yield
Net rental yield takes into account expenses related to the property, providing a more accurate picture of the return. The formula is:
Where:
Annual Expenses include costs like property management fees, building/community service charges, maintenance, insurance, and property taxes.
Example Calculation
Suppose you purchased a rental property for AED 2,000,000 and it generates AED 200,000 in annual rental income. If your annual expenses amount to AED 50,000, here's how you would calculate the ROI and rental yield:
1. Gross Rental Yield:
2. Net Rental Yield:
3. ROI / Return on Investment:
Assuming you invested AED 500,000 of your own money (down payment) and financed the rest:
Net Profit = Annual Rental Income - Annual Expenses - Mortgage Payments
If mortgage payments are AED 100,000 annually:
Net Profit = AED 200,000 - AED 50,000 - AED 100,0000 = AED 50,000
These calculations help investors assess the financial performance of a real estate investment and make informed decisions.
