The world of investment is a problematic area of access for the neophyte who wants to get value for money without knowing the background. Real estate investment is very Interesting and can be profitable with proper planning. Before embarking on the acquisition of real estate, one must first check how, in the sector of real estate investment, one must make its calculations of profitability.
Plan your real estate investment:
Profitability calculations to avoid illusions:
The estate ads often refer to high profitability in the case of income properties. It’s easy to manipulate the numbers by playing with the variables, but at the end of the day, it’s the result that has to matter. It is necessary to know, before embarking on an investment in the real estate field, if sufficient profits will be released. The profitability calculation must, therefore, be carried out carefully to avoid disaster.
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The principle of real estate investment:
The Principle of real estate investment is the same as that for any investment with a financial institution. It’s about placing your money in a property by wishing to make a profit from the rental income. The only change is that in the circumstance of the purchaser of the real estate, it is up to him to calculate the rate of return he will get and not to a financial institution.
Different types of profitability calculation:
Know the value of real estate investment through profitability calculation
The profitability calculation is essential to determine whether or not it is appropriate to make a real estate investment and predict the value of an investment. When this investment is real estate, we talk about rental profitability. It can be a building, a studio, an apartment or an office. The lease of the real estate produces the interest of the property that was the subject of investment. This calculation shows how much the rental of the property relates to the price it has cost to purchase and the costs that this property entails. Returns may differ by geographic area in addition to other factors.
The starting bet in real estate investment:
It includes an initial down payment and the recording of income and expenses. Profits or losses result. Sometimes the acquisition of the property is made with the intention of reselling it later when its value has been maximized, and its profitability demonstrated.
In a real estate investment, the starting bet includes future cash flows. The calculation of these flows is based on the valuation of the company involved in the real estate investment. The investor must also provide a down payment on the mortgage balance. Amounts spent on purchases and renovations are also considered part of the purchase cost. Real estate investing also involves current expenses such as electricity, insurance, and maintenance. All are tax-deductible and will have an effect on the profitability of the property.
The calculation of gross profitability and real estate investment:
It is generally accepted that the purchaser of real estate has four ways of calculating profitability. Among other things, it can calculate the gross profitability (or total yield) of real estate from the cost price of these properties and take into account in its calculation only the annual amount of rents received, not including expenses. Cost price means all costs attributed to the property until it is made available to the tenant. The cost price, therefore, includes the purchase price, to which are added various charges such as bank, notary, agency fees as well as the cost of the work.
The limits of the calculation of gross profitability:
This calculation, used by most real estate agencies, has certain limitations since it does not take into account certain ancillary costs. In fact, it is sufficient to multiply the amount of twelve months rent per hundred and divide the sum obtained by the cost price. The calculation of gross profitability gives a rough idea of the profits to be anticipated. As it often results in a high amount due to factors it does not take into account; real estate agencies use it as a business argument. Additional information is required for the investor who uses this type of calculation.
The net profitability calculation: a more precise indicator of the value of real estate
The net profit (or net yield) is another form of profitability calculation used to try to determine how the property investment will be profitable. It gives a better idea of the real profits. The net return determines the proceeds of the investment net of taxes.
Elements to be deducted in real estate investment:
Before proceeding with the calculation, many items are to be deduced, such as the property tax, the different insurances, the fees imposed by the agency involved in the acquisition of the real estate, the management and credit fees as well as the expenses maintenance. The rental vacancies can also be taken into account to get a more accurate picture. A rental holiday is a period when the unit will not be rented. It is estimated that, on average, a property may be vacant for one month every three years. For smaller areas, it would be rather a month per year since the turnover is higher in this case.
A profitability calculation that takes into account more factors:
This calculation, therefore, takes into account a more significant number of elements. At the amount of the multiplication percent of the twelve months rent, subtract the total expenses. The sum obtained is divided by the cost price of the property. This calculation method gives a better picture of the possibility of making sufficient profits. The result should not be too close to zero so that we can anticipate an adequate gain since we must then take into account the tax levied on the number of rentals.
Take into account the tax system for calculating net profitability:
In the case of net profitability, the tax regime adopted for the purchaser’s tax return will influence the result. The real plan is generally the preferred plan for its many tax-deductible elements. Since each investor has a different tax profile, the same investment can produce different results for each investor. Various taxes are related to real estate investment, such as property income and social security contributions. The attentive investor will also obtain tax credits depending on the type of property acquired and the form of his investment. There are also tax exemption products.
The internal rate of return: a more complex profitability calculation:
The internal rate of return (IRR) is, for its part, even more precise, but of greater complexity. For this rate, the present value of the net profits resulting from the real estate investment is equal to the current amount of the disbursements that were necessary for the realization of this investment. The cash flows of real estate investment, which have a significant impact on the final result, are taken into account in the calculation.
The importance of the profitability calculation at the time of the down payment
Calculate the percentage of the amount of real estate investment:
Predictions must be made to avoid unpleasant surprises and lost money. It is better to use the banking institutions and get a loan to avoid investing too much capital in an operation that involves its share of risk. Whatever the type of calculation, it must be done over a year to forecast the annual gain, which makes it possible to know if the investment is in the process of generating thrilling profits. The result appears as a percentage of the amount of real estate investment. The higher the rate.
The profitability calculation after a few years:
A few years after the acquisition of the property, it is possible to calculate its profitability by highlighting the profits obtained since the time of the initial investment. The rate of return is derived from the number of years since the acquisition of the property about the accumulated profit. The yield on investment thus produced allows the property owner to position himself about the marketplace if he needs to sell his property.stment is profitable.
A real estate investment as a lever of credit:
Real estate investing can be done even if there is little start-up capital available. If the profitability calculation demonstrates the possibility of earnings, it is easy to take out a loan. The principle of credit leverage is in favor of the investor who has to look for the cities where the yields are the best.
Profitability calculation and capital expenditure:
Capital expenditures for the acquisition of a property and for its sustainable improvement are considered part of the investment and are not tax deductible as they are intended to increase the value of the property. It is not a matter of operating expenses and maintenance of income. Capital expenditures are nonetheless used indirectly to pay fewer taxes since they are included in the long-term depreciation expense. If the property is resold, the charges will apply to depreciation claims and capital gains.
The mortgage rates are also an essential factor for achieving profitability and investment is subject to changes in interest rates. Of course, the lower the price, the better the return of capital.
Real estate investment: different factors to consider for the calculation of profitability
A favorable environment for real estate investment:
Investors should also consider other factors that will affect the value of the property. The geographical location of this property will also play a role in its profitability, as well as the general state of the premises. It also requires flair and monitoring potential urban projects that can lead to an increase in the value of real estate, as the arrival of a shopping center or even a large university. It is not necessary to consult a real estate agency to calculate profitability.
Simulators to facilitate profitability calculation:
Several websites offer easy-to-use profitability simulators. Some are however more efficient than others, and the investor must be vigilant when making his choice. Since tax rule applications are relatively similar regardless of location, with the exception of tax rates and depreciation types on real estate, the calculator provides a realistic picture of the investment. It takes into account the two types of real estate depreciation related to the property and its costs, leaving aside the land and the associated costs.