ROI
Return on Investment
- What it is
- A measure of the return on funds invested
- How it is calculated
- Net profit from an investment divided by the amount invested
- What is often hidden
- Costs: taxes, maintenance, management, void periods, exit fees
- A feature of programmes
- Part of the investment is non-refundable, and this changes the whole arithmetic
- The right approach
- Calculate the full cost of the programme separately from the investment part
In plain words
ROI (return on investment) is a measure of the return on funds invested: the net profit from an investment divided by its amount. It is a simple and convenient indicator which, precisely because of its simplicity, is most often used to embellish the picture.
The key question is always the same — what is included in the calculation. A realistic ROI on real estate takes everything into account: tax on rental income, the annual property tax, service charges, the management company’s fee, repairs, void months and, on exit, capital gains tax and agents’ fees. The figure in a seller’s presentation usually takes into account only the rental rate and the purchase price.
Investment migration has a feature of its own. Some costs are by their nature non-refundable: a contribution to a state fund, due diligence fees, duties. Treating them as part of the investment and expecting a return is wrong — they are the cost of obtaining status. The right approach is to separate them: here is the cost of the programme, and here is the investment part, on which a return can genuinely be calculated.
When it is calculated
What to include in the calculation
- Rental income
- Real occupancy
- Growth in value on exit
- Taxes on income and property
- Maintenance and service charge
- Repairs and management
- Transaction costs
- Capital gains tax
- Intermediaries’ fees
- Non-refundable contributions
- Due diligence fees
- Cost of maintaining status
How to calculate realistically
- 01Separate the programme from the investment
- 02Gather all cost items
- 03Allow for void periods and risks
- 04Calculate the exit scenario
- 05Compare the options
What you need to know
- The ROI in a presentation is usually gross, not net
- Costs of ownership eat up a noticeable part of the income
- Taxes on exit change the final picture
- Non-refundable programme fees are not an investment
- The property’s liquidity matters more than an attractive figure
Common mistakes
- Calculating from the seller’s figures without checking
- Not allowing for void months
- Forgetting taxes on sale
- Including non-refundable fees in the investment calculation
- Ignoring liquidity and exit timing
What this means for a BRIDGES client
We always separate two things: how much it costs to obtain status and how much the investment part can earn. Mixing them is the most common way of getting an attractive but meaningless figure.
Frequently asked questions
01 /How is ROI calculated?
The net profit from an investment is divided by the amount invested. The key question is what exactly is included in the profit calculation.
02 /Why are the seller’s figures higher?
They are usually gross: they take into account rental income and the purchase price, but not taxes, maintenance, management, void periods and exit costs.
03 /Should the programme contribution be counted as an investment?
No. The non-refundable contribution and fees are the cost of obtaining status. They are calculated separately from the investment part.
04 /What is most often forgotten?
Void months, tax on rental income, service charges and capital gains tax on sale.
05 /Does liquidity matter?
Very much. A high calculated ROI is useless if the property cannot be sold within a reasonable time at the calculated price.
06 /What data should be used?
Real rates for the particular area and confirmed costs, not averages from presentations.
See also
Read next
This material has undergone editorial review by BRIDGES.
Calculating the return on an investment?
We will calculate the full cycle — entry, ownership, exit — with taxes and without embellishment.