Blog | 25th October 2021

How to measure ROI

Return on Investment is the bottom line – own the jargon, the acronyms and the numbers with our easy ROI cheat sheet for cash purchases.

Property investment is intimidating at the best of times.  It can feel even more confusing when you add in a pandemic, economic trends and a whole bunch of acronyms to confuse the issue. However, there is a reason that top economists continue to invest in property and we’re here to simplify things for you.

The bottom line in understanding property investment is return on investment or ROI. Put simply, it’s the number you need to know in order to determine whether your investment is viable. We’ve put together a cheat sheet for cash investors to help you understand exactly what your money can do for you.

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 work out your ROI, determine a set amount of time over which your calculations should span. We use the example of a cash investment at a purchase price of R1.2 million over the span of 12 months.

  • The property increased in value by R100 000 in one year.
  • The monthly rental income is R10 000 a month.
  • The monthly rental expenses are R2 000 a month (including, but not limited to, levies, rates, taxes, management fees, rental insurance and maintenance costs).
  • This  yields an NOI of R96 000 or 80% of the net annual rental income.
  • Total ROI at the end of 12 months for our example is 16.3%.

This means that our investor would  get 16.3% of the investment back per annum.

To understand the costs it is sometimes easier to look at rental yields. A gross rental yield does not take operating costs or taxes into account which is why we advise investors to look at net rental yield in their calculations. Our property example has a net rental yield of 8% which means that our investor would pay off the property in approximately 10 years or less.

The average net rental yield in South Africa is currently around 5-6% annually. Investors can expect rental prices to increase by up to 5% annually in the current economic climate. Analysts are hopeful that this amount will increase in 2022 as the economy recovers. If you can get a net rental yield of above 6% per annum your property is a sound investment.

Reeflords Invest-Assist

If you’re still feeling overwhelmed by the numbers, we have put together a package that takes the maths out of your investment process. Invest-Assist offers pre-tenanted units where we have worked out all the financial indicators on your behalf.

Excitingly, the average net rental yield for our Invest-Assist portfolio is 7.31%. This means that you should earn back your investment in 10-15 years should the property appreciation rate and rental increases remain consistent over that time.

The best news is that we will walk you through the investment process from start to finish and offer support after you take ownership of your property. It’s an investment with a safety net – easy to navigate and easy to understand.

Next month we will unpack the next layer of the ROI calculations when we look at properties invested through a mortgage bond.

Find out more about Invest-Assist. Contact us.

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