Calculating the home’s potential to generate a profit will provide a clear picture of how well a property is performing as an investment, helping you decide whether it’s worth holding onto, selling, or upgrading.
READ: Ways to ensure your home holds its value over time
Explaining it in simple terms, Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa says that conducting a return on investment calculation helps homeowners evaluate how much income the property can generate in comparison to the costs of owning it. “This is an important calculation to conduct if you plan on using the property to generate rental income, either now or in the distant future,” he notes.
The first thing to do is to determine your total investment cost. “Start by adding up all expenses related to the property. This includes the purchase price, transfer fees, bond registration costs, and any renovations or repairs done before you start renting it out,” says Goslett.
Next, you need to find out what you can charge in rent – a local real estate professional will be able to assist you here. “Once you know what you can charge in rent, multiply the monthly rental income by 12 to determine the total income for the year. For those who already have a tenant in place, if the property was not fully tenanted throughout the year, adjust this figure accordingly,” says Goslett.
You then need to account for ongoing costs, such as rates and taxes, insurance, property management fees, and maintenance expenses. Subtract these from the annual rental income to get your net rental income. To get an ROI percentage, divide your net rental income by your total investment cost and multiplying the result by 100.
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Example: Let’s assume you purchase a property for R1,500,000, spend R50,000 on renovations, and incur R75,000 in transfer and bond costs. Your total investment cost is R1,625,000. If the monthly rental income is R12,000, the annual income is R144,000. After deducting annual expenses of R24,000, your net rental income is R120,000. Using the formula: ROI = (120,000 / 1,625,000) x 100 = 7.4%. This means your investment generates a 7.4% annual return.
“You typically want the ROI to be higher than inflation. A strong ROI indicates a profitable investment, while a low ROI might signal the need for adjustments, such as increasing rental rates or reducing expenses,” Goslett explains.
While ROI is a valuable metric, Goslett also highlights the importance of considering other factors, such as property appreciation, market trends, and the economic climate. “It is always advisable to conduct regular research by consulting with your local property professional to ensure your investment strategy remains on track,” he says.
READ: Tips: 3 ways to stay on budget when renovating your home
Seeff’s agents highlighted some cost-effective improvements which can increase the value and make the property more attractive to buyers. (click here to read the full article)
Repainting. New modern colours such as grey, green and even black are all the rage right now, but it does not have to be as dramatic as that. Even just upgrading the exterior and interior in new paint tones, albeit fairly neutral, can add value and could spark buyer interest.
Floors and tiled areas. Floors can be modernised with wooden or laminate flooring, or feature tiles in the latest trends, or new carpets. Wall tiles can also be replaced to give an instant update to the appearance of the kitchen and bathrooms.
Kitchen and bathrooms. If you are unable to do a complete remodel, consider cosmetic upgrades such as painting the cupboards, fitting new handles, adding open shelves, a new stove and appliances, new bathroom fittings, new mirrors and new towels.
Doors and bedroom cupboards. Another cost-effective way to upgrade is to change the door and cupboard handles given that there is now such a wide choice available. If the cupboards are old, you can repaint and modernise rather than replace.
New lighting and window coverings. You can also consider upgrading exterior and interior lighting to modernise the home. Upgrade your curtains or add American shutters or wooden blinds. You could also change from kirsch rails to rods to give it a modern touch.
Convert your patio into a braai room. If you have a patio, consider enclosing it and adding a built-in braai, and sliding or stacking doors to open it to the garden. This will enable you to enjoy year-round braai get togethers regardless of the weather, and add value.
Update the garden. Aside from general maintenance, you can add outdoor pots, or paint your pots or old garden furniture to give it a new lease on life. Adding pathways and garden décor can add interest to the garden.
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