Everyone is serious about investing and already has or is planning to invest in real estate and other properties. However, not everyone has the skill and patience to see a profit. This article aims to answer that question as well as provide practical tips on how to earn your investment.
Although the real estate industry may have seen a downward trend early in 2021, it might now be on the up and up as restrictions ease and the economy reopens. According to Colliers, the Philippine real estate market is poised for a rebound in 2022, as vaccination rates are on the rise and business and consumer confidence continue to stimulate economic growth. These developments underscore how real estate remains one of the best investments in 2022.
Compared to other investments, such as stocks and bonds, real estate has a relatively manageable level of risk, making it a viable long-term investment. It can continue providing you with a steady income stream even when low-interest rates and inflation happen.
The question is, how long does it take for you to make a profit on your property?
This article will give you a clear perspective regarding this age-old question, as well as helpful tips on calculating your ROI on luxury real estate investments. Let’s dive right in!
The answer: It depends.
No two properties are alike. Several factors help determine how long it will take for your property to produce profit and how much its ROI will be. But as a rule of thumb, most real estate investors say it takes five to seven years for luxury properties to turn in a profit.
Some factors that can affect your returns are:
Supply and Demand
- Suppose you own a condominium unit in Bonifacio Global City. If many people want to stay there, the demand is high, but units will also sell out faster, accelerating the time it takes to earn a profit.
Economic Outlook
- If your property’s location is yet to be developed, you might still have to wait until the surrounding area generates enough demand for more people to start moving there. Here, an area’s development tends to rely on the country’s economic performance, among other factors.
Market and Competitive Pricing
- With so many locations that buyers can choose from, it’s natural that developers and sellers set their prices competitively.
- Finding a better deal just a few blocks from your property can sway a potential buyer’s decision. Lowering your price or including attractive features in the property could help you make a sale but simultaneously reduce your ROI.
Developer Reputation
- The developer can influence potential buyers more than you might think. For instance, properties from certified developers such as Mandani Bay — developed by HTLand Inc., a joint venture formed by Hongkong Land and Taft Properties — tend to give much higher ROI than properties developed by real estate firms without a bankable track record.
How to Calculate ROI on a Luxury Real Estate Investment
ROI or return on investment is the profit you could gain from your investment. It is vital to know how to calculate the money you can gain from your real estate investment.
Based on ROI
Note that the purchase price and property value aren’t necessarily the same.
Imagine buying a luxury property for P6 million and spending P1 million on upgrades. While the purchase price is P6 million, your total investment would be P7 million (purchase price plus cost of upgrades).
As you can see below, knowing the difference between the property’s value before and after improvements will help with your ROI calculations.
Cost Method
Investment profit / Investment costs
- Purchase price = P6,000,000
- Upgrades = P1,000,000
- Total investment = P7,000,000
- New value of property = P9,000,000
Suppose you take the property, renovate it, and sell it for P9 million.
To calculate your gain in the property, subtract your investments (purchase price and upgrades) from the property’s new value. In this case, you’ve gained P2,000,000 (P9,000,000 – P7,000,000).
Once you know your gain, divide it by all purchase-related costs to get your ROI.
([P2,000,000 / P7,000,000] x 100)
Here, your ROI would be 0.28 or 28%.
Out-of-Pocket Method
Equity / New Value
This method tends to be used more when you purchase your property with a loan, which acts as leverage. The ROI through this method will be much higher as a result.
Using the same values from the example above, except that you financed the purchase with a loan and paid a down payment of P3 million.
- Purchase price = P6,000,000
- Out-of-pocket expenses = P3,000,000
- Upgrades = P1,000,000
- New value of property = P9,000,000
Your equity costs (out-of-pocket expenses and upgrades) subtracted from the new value will then be P5 million.
Your ROI is thus 0.55 or 55% (P5,000,000 / P9,000,000).
Based on Real Estate Type
Your ROI can also depend on the kind of real estate investment you own.
Resales and Cash Sales
If you plan on reselling or “flipping” the property you purchased, resales and cash sales tend to be the easiest way to compute your ROI. It’s just like using the cost method:
(Your net profit / total investment) x 100
Rentals
(Annual rental income – Annual operating costs) / property or mortgage value
If you plan to rent out your property, you must first compute your annual rental income. Before setting your rent, research how much owners of similar properties charge for monthly rentals.
Suppose you bought a property at P2,000,000 and set its monthly rent at P30,000 or P360,000 every year. Factor in the operating costs like taxes, repairs, and advertising, to name a few.
If your operating costs are P100,000 in a year, your ROI would then be 0.13 or 13% ([P360,000 – P100,000] / P2,000,000).
REITs
Real estate investment trusts (REITs) operate like how stocks are exchanged. The benefit of REITs is that you diversify your portfolio (investing in malls and hotels simultaneously, for instance) without maintaining a physical property. But since they trade on an exchange like stocks, they’re also more volatile.
The dividends you receive will depend on which REIT you invest in. However, according to Section 7, Article II of Republic Act No. 9856, REITs must distribute at least 90% of their income as dividends to shareholders.
A key point to remember is that “good” ROI is subjective. That is a great investment for one might seem insignificant for another. It depends on how much you are willing to risk—the higher your risk, the higher your ROI.
For Closure
How long it will take for you to profit from your property depends on several factors. Before making any investment, analyze your potential ROI and make profit projections to see whether it’s a worthwhile investment.
ABOUT THE AUTHOR: Luis De Leon
