THE TRUTH ABOUT YOUR RETURN ON INVESTMENT
There are many myths and misunderstandings around the growth of property. Often, when people look at the growth in property, they do not consider the total growth. Let’s speak about the total return on investment (ROI) on a property. There are two things to consider, namely your Capital Growth Rate and the Capitalisation Rate.
The Capital Growth Rate is the percentage with which the market value of a property grows annually.
The Capital Growth Rate is not the only return that you get on your property investment. You also receive monthly rental income, whether you are renting from your trust or renting it out to a third party. Your property also has expenses such as rental agency commission, levies, rates and taxes and maintenance. One must, however, keep in mind that you might not always have a tenant.
The Capitalisation Rate calculates the return you receive on your investment after all the property expenses have been paid. The formula to calculate it is:
When doing projections, it is always best to be conservative and work on 10 months’ rent, with one month budgeted for vacancy and one month for maintenance.According to FNB’s latest research, lower-middle-income areas (Average Price: R952 964) have a Capital Growth Rate of 6.4% year on year. If you invest wisely in these areas, you can get a property that can produce a Capitalisation Rate of 8%. This means your total return is 14.4% on a low-risk investment, which is excellent!
This is not taking into consideration that your rental income grows every year (currently at 7.62% a year) or buying a property at a discount (below market value) which can significantly increase your return. And we have not even taken leverage or gearing into consideration, but stay tuned for more on this subject in our next article.