Blog | 22nd November 2021

How to measure ROI with a Mortgage Bond

Demystify Property Investment with our easy ROI cheat sheet for properties invested through a mortgage bond

When it comes to property investment, tracking the performance of your asset is crucial in understanding your true return on investment. They say landlords grow rich in their sleep, but do you really understand the ins and out of Return on Investment (ROI)?

In Part 1, we walked you through how to calculate the ROI for a cash purchase. Most investors, however, purchase a property with a bond or mortgage which comes with slightly different calculations and variables. To demystify the process, we’ve put together a cheat sheet to help you calculate the ROI on your mortgaged investment property

Financial Indicators Cheat Sheet

 Capital AppreciationCapital Appreciation RateAnnual Net Operating Income (NOI)Net Rental YieldReturn on Investment (ROI)
Basic DefinitionHow much your property value increases over a period of time.Indicates the rate of growth of your property value.Annual profit made from rental income.What you actually make from rental income.How much of your money will be made back over a certain period.
Formulamarket property value – purchase price = capital appreciationcapital appreciation ÷ purchase price = capital appreciation rate (%)total annual rental income – total annual rental costs = NOI (%)NOI ÷ purchase price = net rental yield (%)(capital appreciation + NOI) ÷ purchase price = ROI (%)
BenchmarkThe current value of your property can be assessed by an estate agent.The average property appreciation rate was 2% in SA in 2020. Any appreciation over 2% is considered good.An NOI at 65% of annual rental income and above is in a good position. Your operating costs should stay below 35% of your annual rental income.A net rental yield above 6% is above average in South Africa.A ROI of 10.5% and above is considered good. One of above 12% is considered excellent.

The Basics

To illustrate the ROI concept, we’ll use an example of a property purchased with a mortgage or bond at a value of R1 million. We’ll use a 12 month period to calculate our ROI. When you purchase a property with a bond, you are not paying the full purchase price upfront. For our example, we’ll use a 10% deposit of R100 000.

  • The property has a purchase value of R1 million.
  • We paid a 10% deposit of R100 000.
  • Our Bond amount is R900 000.
  • Once-off purchase costs are R50 000 (including but not limited to transfer fees ortransfer duty, bond costs, initiation fee from the bank, and the insurance certificate).
  • The monthly rental income is R8000.
  • The monthly operation costs are R2300 (including, but not limited to, levy, rates andtaxes, maintenance fees, and management fees).
  • The monthly bond repayment is R5500 based on 7.3% over 20 years.
  • The net monthly income is R200.
  • The selling costs are R60 000 (including, but not limited to, agent commission andrates clearance certificates).
  • The market price of the propertyafter 12 months is R1.1 million.
  • The capital appreciation rate is (R1.1mil–R1mil–R60000) / R1mil = 4%.
  • Total ROI at the end of 12 months for our example is 28%.

The Breakdown

We have a property with a purchase value of R1 million. We have paid a 10% deposit ofR100 000, and taken a bond for the remaining R900 000. We have also put down an amount of R50 000 for once-off costs.

This would mean that your initial down payment would be the R100,000 deposit plusR50,000 for costs, which gives you a total down payment of R150,000. We’ll come back to this figure to calculate our final ROI.

As this is an investment property, we now have a rental income from our tenant of R8 000per month. We’ll also have to take into account our monthly operation costs of R2 300, as well as the monthly bond repayments. Let’s assume the bond we took out is at a rate of 7.3% for 20 years, making our monthly bond repayments R5 500. The total monthly costs of the property are the R2 300 operating costs, plus the bond repayment cost, coming to a total of R7 800.

As we are receiving a rental income of R8 000 per month, we are left with a surplus or profit of R200 per month. This is our net monthly income. This may not seem like a significant profit, but let’s continue. There’s light at the end of the tunnel.

After a period of 12 months, the property value has increased by R100 000 to R1.1 million(your capital appreciation). Although property is a long-term investment, we’ll have to deduct the selling costs from the appreciated value to get our capital appreciation rate. For our example, the selling costs are R60 000. When we deduct the costs from the R100000 capital appreciation, we have a net capital appreciation of R40 000. This, divided by theR1 million purchase price, gives us a capital appreciation rate of 4%.

From 2020 to 2021, the average appreciation rate in South Africa for residential property is just under 2%, and anything above that is an above-market average investment.

We then need to look at our Annual Net Operating Income. From our total annual rental income of R96 000, we deduct the total annual operational cost of R93 600. This gives us an annual net operating income of R2 400 for the year.

The most important financial indicator for most investors, however, is Return on Investment. When calculating our ROI, we must sum up the capital appreciation and net operating income, then divide it by the initial down payment of R150 000. This gives us a return on investment of 28%.

The average ROI for investment properties in South Africa is approximately 10%. Most investors will look for anything above that figure as a sound investment property, and anything above 12% per annum is considered an excellent investment.

There are many variables that will affect the ROI of an investment property, such as the purchase price, the rentability of the property, and the appreciation around the area over time. All of these factors play a major role in your investment, and it’s imperative to do your due diligence before you jump into investment property.

Reeflords Invest-Assist

If appreciation rates and net operating income is a little too intimidating for you, you’re not alone. We’ve recently launched a brand new product to help savvy investors, and beginners alike, along on the buy-to-invest journey. We offer premium, pre-tenanted units with every financial indicator pre-calculated for you. From net rental yield to capital appreciation, we’ll demystify the property investment process and support you every step of the way.

If you’re looking to start your investment journey with expert guidance and assistance, and learn more about Invest-Assist, contact us now.

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