ROI 101 – Real Estate
By: Cherine Khouzam
Ever heard the term ROI? For example: “Make sure your ROI is protected”, or “Ensure a profitable ROI” and of course “The highest ROI guaranteed!” Well for starters this is the best definition I could find for this term:
Return on Investment (ROI).
- Definition: A profitability measure that evaluates the performance of a business by dividing net profit by net worth.
- In English: How much money will I make by spending the investment then exploiting (developing) it.
Sound complicated? Not at all, here is the usual formula used in real estate:
ROI Gain from Investement ÷ Cost of Investment
For example: You purchase a property for $300,000 USD in Los Cabos with the intention of renting it weekly/short term (note there are approx. 12 “prime weeks” in the general resort rental market but the reality is that Los Cabos benefits of a minimum of 34 weeks of high season weeks!).
Add all your investment related yearly expenses (such as property taxes, home owner dues, property management, rental and other fees) and subtract them from the potential income; your net or ROI should look something like this:
- 25,760 rental income (average 23 weeks or $160/night, I’d rather be conservative)
- 300 property taxes (very realistic and quasi negligible)
- 3,000 HOA ($250/mth on average)
- 4,000 property management and rental fees (may vary)
- 1,000 other fees (insurance, gardener, pool maintenance, etc)
- $17,460 Net per Year ÷ $300,000 = 0.0582 or 5.82%
This means that you will receive a 5.8 percent return on your investment each year just on a cash basis. This does not take into account the appreciation of your principal investment (for instance the yearly increase in value in the Los Cabos market has been 10% when averaged over the past 30 years) or the benefits of usage. Buying a home or building a home on a lot is like an investment portfolio that you can live in and leave to your heirs. And, a typical ROI on rental investments may be in the 4-8% range.
Of course, this is a small example of how to structure your investment in Los Cabos so it can make babies for your wallet, and many variables are to be considered but in general, this should spring your ideas into action!
Throughout the entire process, know that we at Coldwell Banker Riveras are in the best position to assist you in this potentially very fruitful process. Have any questions? Send me an email at firstname.lastname@example.org
For more information about Coldwell Banker Real Estate Services and Baja California Sur lifestyle and news, call us to + 52 (624) 143.1341 or send us an email to email@example.com