How do you calculate a real estate rate of return?
More and more French people are interested in rental investment in Dubai, and rightly so! Dubai offers some of the highest rates of return in the world. Dubai Immo takes a look at the method you need to use to correctly calculate the rate of return on your real estate investment.
What is the rate of return in real estate?
Calculating the rate of return is an essential indicator in assessing the financial performance of a property investment. It measures the return or profit generated in relation to the amount invested. Understanding how to calculate the rate of return is crucial for investors and managers to make informed decisions.
What is the formula for calculating the rental rate of return?
The formula for calculating your rental yield is as follows:
Rental rate of return = (Net profit / Total investment) x 100
What is net profit?
Profit includes all income generated by the apartment or villa, i.e. rental income from an investment property. To determine the net profit, you need to subtract all investment-related expenses, such as condominium fees, operating costs and any taxes, from the rental income. In short, net profit is income minus all expenses and taxes.
What is total investment?
This is the price of the property, plus all the costs associated with the investment. The costs associated with the purchase of an apartment or city can include notary fees, any agency fees, exchange and transfer fees, etc. If the apartment has been furnished or fitted out at the owner's expense, these costs must also be added to the total investment.
This includes all income generated by the investment, such as rental income, product sales or interest earned, minus expenses related to the investment, such as operating costs, taxes and interest paid. Net income is therefore equal to revenues minus expenses.
Example of how to calculate a rental rate of return in Dubai
Mr. Pierre Dupont bought a studio apartment in Jumeirah Village Circle in 2020, for AED 450,000. Mr. Dupont bought the apartment off-plan via the Dubai Immo agency, and therefore paid no agency commission. The total investment therefore consisted of the price of the apartment and the cost of registering his apartment with the Dubai Land Department.
Calculation of the total investment for Mr. Dupont
AED 450,000
+ 4% notary fees
+ AED 2,000 administrative fees charged by the developer
= AED 470, 000 total investment
Calculation of net profit for Mr Dupont for his first full year of rental
AED 50,000 in rent received
- AED 5,500 in co-ownership charges
= AED 44,500 in net profit
Calculation of rental profitability for Mr Dupont's studio in year 1
44,500 / 470,000 = 9.46% net profitability
We have taken into account all the costs associated with the purchase of this apartment, and are able to determine the return on investment at 9.46%.
ATTENTION: Most real estate agents or investors would have obtained a different result. In fact, we've seen in the field that most people make the following calculation: gross rental income / apartment price. A very big mistake. With this calculation, profitability would have been 11.11%. A misleading result, which would unfortunately place the investor in error.
How do you calculate the full profitability of a property, taking into account the appreciation in its value?
To calculate the profitability of an investment accurately and satisfactorily, you need to take into account changes in the value of the property in question. Whether its price goes up or down, for that matter.
To include appreciation in the profitability calculation, use the following formula:
Rate of return = (Net income + Value appreciation) / Total investment x 100
In this formula, value appreciation represents the estimated increase in the value of the property. This estimate can be based on real estate market analyses, professional appraisals or historical data. In some cases, we can also estimate the potential increase in value of a property as part of a future profitability model.
It's also important to note that some investors may choose not to include value appreciation in the profitability calculation, focusing solely on the cash flows generated by the investment (revenues and expenses). This allows for a more conservative perspective, based on more tangible elements.
Ultimately, whether or not to include value appreciation in the calculation of profitability depends on the preferences and strategies of each investor. In the context of real estate investment in Dubai, we believe it is important to consider all aspects of the real estate investment to get a complete picture of its potential profitability.
