Introduction How To Determine A Property’s Return On Investment

How to determine a property’s return on investment Expecting a solid return or profit on the amount spent is always on your mind when you are looking to sell your property. To calculate the net profit, a number of factors in the expense column should be take into account.
When you decide to sell your property, you want to know how much money you will make. In a technical sense, you are discussing ROI (Returns on Investment) estimation. After accounting for all of the costs involve, it is used to determine the percentage gain from an investment ( a piece of property).

You must calculate the return on investment (ROI) from the sale of your property in order to make an inform selling decision.

This metric can assist you in determining whether now is a good time to sell, setting a price for your home, comparing the various offers made by buyers, and, most importantly, determining whether you will earn money from the sale.

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Costs To Take Into Account While Determining ROI

These are some of the major costs involved that you should be aware of when calculating the ROI on your property

Cost Of Acquisition

These are the expenses you incurred when you bought the house you’re trying to sell

• The cost of the property, which you would have paid to the vendor of the subject property. When you bought the property, you would have paid stamp duty and registration fees to the state’s Registration and Stamp Department.

• Brokerage: This is the fee you would have given your broker when you first bought the property as compensation for his or her services. If you have not used a broker’s services, this expense may not apply to you.
• Home loan interest component: If an institutional bank had funded your property, you would have paid a sizeable sum in total interest over the loan value.

Operating Expenses

These are the expenses that you incurred while you were the property’s owner

• Charges for maintenance You must have been paying maintenance fees to the appropriate housing society if your property is an apartment in a housing society.
• Real estate taxes You pay this tax as a property owner to the relevant municipal corporation for the maintenance of your neighbourhood’s public services and infrastructure, such as water, electricity, roads, etc.
• Refurbishment and repair costs These include any costs incurred for renovations and repairs, such as redoing the kitchen, updating the bathroom’s plumbing, and painting the home, among other things.

Selling Expenses

These are the expenses you might have while selling your home.

• Brokering the fee that you will now have to give your broker as compensation for assisting you in selling your property.
• Commercial: the price of publishing advertisements in newspapers or purchasing a premium package from an internet platform for listing properties This could make up a sizable portion of the costs associated with selling your house.

How Can I Calculate ROI

Now that we are aware of the various expenditures involve, let’s use a simple example to start understanding how to calculate ROI

Illustration 1

You paid Rs 32 lakh for a property in Nagpur, Maharashtra, on November 1st, 2017. Now, you choose to put it up for sale at Rs 40 lakh on November 1, 2020.

For simplicity’s sake, we are not accounting for any additional expenses you most likely incurred throughout this transaction.

You anticipate a 25% Return on Investment (ROI) from selling your property. Another way to look at it is that you earned returns of Rs 8 lakh on an investment of Rs 32 lakh. These profits will be in addition to your 32 lakh rupee initial investment cost.

If you receive five price offers for your house, compute the ROI for each bidder to evaluate the value of the offer. Put the amount they are offering into the variable labelled “current value of investment” and compute the ROI in the same way.

Illustration 2

You paid Rs 32 lakh for a property in Nagpur, Maharashtra, on November 1st, 2017. You didn’t borrow money to buy this house. However, there are additional cost factors, such as maintenance fees and remodelling.

brokerage fees (both when purchasing the property and now when selling it). You make the decision to put it up for sale at Rs 40 lakh on November 1, 2020.
Your property sale is expect to provide an 8.4% Return on Investment (ROI). Another way to look at it is that you will earn returns of around Rs 2.7 lakh on a 32 lakh rupee investment. This will be in addition to the 32 lakh rupees you initially invested.

• For three years, maintenance fees equal Rs. 3,000 each month, or Rs. 1,08,000.
• The cost of remodelling (painting and kitchen design) is Rs. 3,000,000.
• The hypothetical broker fee for purchasing a house for the first time is 2 percent on Rs. 32,000, which is Rs. 64,000.
• Brokerage (speculative; actual commission rates could change) Currently, selling the property will cost Rs 60,000 (1.5 percent of Rs 40,00,000).

As you can see, you won’t be able to estimate your gain until you take into account all of your expenses. Additionally, in the previous example, there were additional expenses that were not mention but that you can incorporate into your situation.

Additionally, we have not taken into account the capital gains tax that would apply to your profit. A long-term or short-term capital gains tax is due on any asset sale. A short-term tax would be assess if you own the property in your name for less than two years.

You would be subject to long-term capital gains tax if you held it for more than two years. While you would be require to pay taxes if you attract short-term gains, by reinvesting the earnings in another residential property, you may avoid paying taxes on long-term gains. Therefore, the amount of tax you paid after selling your house would likewise affect your ultimate profit.

By performing this calculation, you will be able to determine how much profit you may expect from the sale of your property and what price you should set in order to achieve the desired return on investment. However, there are other things to consider when setting your home’s price.

However, checking into and figuring out all expenditures is a difficult process; therefore, you should always seek out the services of a professional to help you in this process.

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