Renting out your property? Here is a simple guide to find out if you are getting a good return on your investment

Property expert Adrian Goslett argued that calculating your home’s potential to generate a profit will provide a clear picture of how well a property is performing as an investment. 

The Regional Director and CEO of RE/MAX  said that knowing this information will also help you decide whether to keep your property, sell or upgrade it. 

The expert said that conducting a return on investment calculation helps homeowners evaluate how much income the property can generate in comparison to the costs of owning it.

“This is an important calculation to conduct if you plan on using the property to generate rental income, either now or in the distant future,” Goslett noted.

So how do you do this?

He said that the first thing you have to do is to determine your total investment cost. “Start by adding up all expenses related to the property. This includes the purchase price, transfer fees, bond registration costs, and any renovations or repairs done before you start renting it out,” Goslett 

The next step is to determine how much you can charge in rent for the property.

To better understand the local property market, consider consulting a real estate expert or researching online platforms like Airbnb to determine prevailing rental rates in your area. 

“Once you know what you can charge in rent, multiply the monthly rental income by 12 to determine the total income for the year. For those who already have a tenant in place, if the property was not fully tenanted throughout the year, adjust this figure accordingly,” Goslett advised.

Do not forget your running costs 

He noted that property owners should not forget to calculate their running costs to maintain the house. 

You then need to account for ongoing costs, such as rates and taxes, insurance, property management fees, and maintenance expenses. 

Goslett said that you then need to subtract these costs from the annual rental income to get your net rental income. 

To get your Return On Investment (ROI) percentage, divide your net rental income by your total investment cost and multiply the result by 100.

Here is an example

If you have a home that you purchased for R1.5 million, and you spent R50,000 on renovations, and incur R75,000 in transfer and bond costs. Then your total investment cost is R1,625,000. 

If the monthly rental income is R12,000, the annual income is R144,000. 

After deducting annual expenses of about R24,000, your net rental income is R120,000. 

Using the formula: ROI = (120,000 / 1,625,000) x 100 = 7.4%. 

This means your investment generates a 7.4% annual return.

Why your ROI is important 

Goslett advised that you typically want the ROI to be higher than inflation. 

In January, Statistics South Africa (StatsSA) noted that inflation rose to 3,0% in December 2024 from 2,9% in November and 2,8% in October. 

“A strong ROI indicates a profitable investment, while a low ROI might signal the need for adjustments, such as increasing rental rates or reducing expenses,” he added. 

While ROI is a valuable metric, Goslett also highlighted the importance of considering other factors, such as property appreciation, market trends, and the economic climate. 

“It is always advisable to conduct regular research to ensure your investment strategy remains on track,” he said.

IOL BUSINESS