How to Calculate ROI on a Property

Whether you are new to the real estate game or are a property mogul, purchasing a property is a big investment decision that requires homework to ensure that you will see a return on your investment (ROI). By understanding the potential ROI, you can evaluate the profitability of your property and compare it to other investment opportunities. Let’s dive in and take a look at what’s involved in working out the potential annual return on your property investment (ROI)...

What is ROI?

Simply put, return on investment is another way of looking at how profitable your investment is: you compare that total cost involved in owning it with the income it generates to arrive at a percentage. We’ll cover this in more detail below. 

How to calculate the ROI on your property

The ROI formula for a rental property, at its most basic:

However, if you are to more accurately work out the ROI, you will also need to consider whether the market value of the property has changed – increased or decreased. If you have a bond on the property, you will also need to add the repayment costs and interest charges. 

In the table below, we have done a comparison of the annual ROI for a property, both with and without finance (i.e. a cash versus a financed purchase).

From the figures, you can see that it’s a no-brainer: the ROI is higher on a property that is not bonded. That said, and depending on the reasons for renting out your property, it’s likely that if you do the numbers right, you will see an overall return on your investment – even if it is mortgaged. 

The total investment is the foundation for the calculations and comprises all the initial input costs associated with the purchase of the property. The simplest calculation is the net profit (income) or loss. You will have a loss when the property expenses exceed the income it generates. 

Now, let’s look at the different components that make up the ROI calculation, which is more than a simple profit and loss sum:

Monthly income and costs

The monthly rental income generated by the property serves as the primary source for covering its monthly expenses. These expenses typically include rates, taxes, levies, insurance, and maintenance costs. If the property is financed with a mortgage, the bond repayments must also be deducted from this income. After covering all these costs, you’ll either end up with a profit or a shortfall. This figure will indicate whether the property has contributed to your financial growth as money saved or earned, or required additional out-of-pocket expenditure.

A necessary evil: an emergency fund

Unexpected events, like a burst geyser, storm damage, or even periods without tenants, are inevitable when owning property in South Africa. While household insurance might cover some repair costs, it won’t compensate for lost rental income or larger maintenance projects. To safeguard your investment, it’s wise to budget for these uncertainties by setting aside funds in an interest-bearing account, ready to use when life’s surprises arise.

Considerations for renting out a bonded property

Ideally, the rent you charge will cover the monthly repayment on the bond. Sometimes this is easier said than done. Firstly, if the local rental market is extremely competitive, there is a chance that the going rate for rentals is such that you will have to supplement the rental income to cover the bond. Secondly, in a variable interest rate cycle, there is no guarantee that interest will not increase. If rates increase, this will have an impact on the margin of profit – or loss – on your rental property. To mitigate against this, you ideally do not want your investment purchase to be 100% bonded, as this can make it trickier to generate good returns. 

Capital Appreciation – or Depreciation 

Because the property is a capital investment, it’s important to consider the extent to which the value of the property will have appreciated over the previous 12 months. You can do this in one of two ways. The first would be to check StatsSA for the latest residential property price indices report (*the national average at the time of writing is roughly 3.5%). 

The second, which would be more accurate and more specific to your locality, would be to ask your local RE/MAX office for a comparative market analysis and to use that as a basis for your ROI calculation. 

If, however, the property market has dropped, these indices and the comparative market analysis will both indicate the extent to which your property might have depreciated. While this figure doesn’t have a direct impact on your bank balance, it does have an impact on your personal balance sheet and your personal net worth. 

Why is calculating total ROI important?

Property investment is a long-term strategy. By focusing on the total return on investment (ROI) over time, you gain valuable insights into your property's performance and how to manage it effectively. This approach helps you to balance maintenance and improvement costs, ensuring the property appreciates in value without overspending or overcapitalizing. It also helps to ensure that the rent you charge both generates sufficient income and is competitive. Last but not least, tracking the ROI on your rental property gives you vital information when you decide to sell. 

If this all sounds daunting to you, it is helpful to know that you do not need to do this all on your own. Lean on the advice and insights of a trusted RE/MAX agent who can help manage your property portfolio on your behalf. 

*Disclaimer: This article is not intended as financial advice. We recommend that you consult a registered financial advisor. RE/MAX of Southern Africa cannot be held liable for any action taken by readers of this article.

Have more unanswered questions? Here are some related questions – and answers – that might help…

Does SARS tax rental income and what deductions can I claim?

Yes, rental income is subject to tax because you must declare it as part of your income, bearing in mind that many of your expenses can be claimed or reduced as deductions.