Real estate investment returns not only provide an accurate picture of expected economic performance, but also identify factors that can positively or negatively impact the investment. By calculating the profitability, you can evaluate whether a property is truly a good investment and compare different opportunities to make the best decision and minimize the associated risks.
Valuing a property: How to calculate the ROI?
ROI, or Return on Investment, is an essential tool for evaluating any type of investment, including real estate. This calculation is based on dividing the net gain on the investment by the total cost of the investment, multiplying the result by 100 to obtain a percentage.
Factors to consider when estimating a property’s profitability
Several factors influence the profitability of a real estate investment:
- Location of the property: the location is crucial, considering aspects such as accessibility, neighborhood quality and development potential.
- Property type: different types of properties attract different market segments and have varying maintenance and management costs.
- Demand and supply in the market: supply and demand in the real estate market directly affect rental prices and, therefore, profitability.
- Associated costs: taxes, fees, insurance, financing costs, repairs and improvements must be considered for a detailed analysis of profitability.
- Taxation: income taxes, IBI and other taxes have a significant impact on net profitability and should be assessed.
What is considered good profitability?
According to the Bank of Spain, a net return of 4% to 7% is considered a good investment. These values vary according to geographic location and other factors, so it is essential to consider the local context when assessing profitability.
Tips for optimizing the profitability of a real estate investment
Once profitability has been estimated, it is possible to maximize it with specific strategies:
- Market analysis: researching current and future trends helps to identify investment opportunities with high profitability potential.
- Acquisition negotiation: seeking properties with the possibility of price negotiation can result in competitively priced acquisitions.
- Efficient management: a preventive maintenance plan, adequate insurance and technology for property management can reduce costs and improve profitability.
- Rental pricing strategy: setting competitive prices and offering additional services can increase the value of the offer.
- Property improvements: refurbishing and improving the property increases its value, boosting long-term capital gains returns.
Risks and precautions when investing in the real estate market
Despite the opportunities, investing in property carries risks that must be considered:
- Risk analysis: evaluate financial and legal risks to make good decisions.
- Resources and liquidity: having resources to face unforeseen events, since real estate investments may be less liquid.
- Professional advice: expert guidance, such as from a local real estate agency, can minimize risks and ensure the success of investments.
- Long-term planning: profitability can take time to materialize, requiring patience and a long-term strategy.
Examples to understand a real estate investment
Suppose you are considering buying a property for €300,000 and plan to rent it for €2,500 per month. Before making a decision, you need to estimate the profitability of this investment.
Gross profitability
The annual rental income generated would be €30,000 (€2,500 per month x 12 months).
Applying the formula:
Return on capital gain
Let’s suppose that after five years, the market value of the property increases to €400,000.
Applying the formula:
Tomaximize your profitability in Fuerteventura, our recommendation is that you always go to real estate professionals in the area. They will advise you on the type of property you should look for, in which area you should look for it, and they will put into practice the best sales techniques so that once you decide to put the property on the market, the profit you can get for it will be the maximum allowed by the market.
If you want to invest in housing in Fuerteventura, do not hesitate to make an appointment with Destiny Home so we can advise you.
