How do profits from real estate investments work?

The many advantages that real estate investments offer to its investors are responsible for the great popularity of this market. Between the security that these applications provide to the invested assets and the diversity of business options, the aspect that most calls the attention of those interested in making their investment in real estate is, certainly, the good potential for profitability.

Therefore, knowing how to calculate the profit of real estate investments is essential for the investor to be able to analyze his business opportunities and choose the ones that have the greatest chance of success. However, many people still have difficulty finding the profit margin for their applications and understanding the real profitability of their investments.

 

To help with this process, we will explain below how to calculate the profit of your real estate investments to facilitate the planning of applications and to leverage your business decisions. See below how the calculation of profit and profitability of properties for sale and for rent works.

 

How to calculate the profit of a property for sale?

For a property purchased for R $ 250,000.00 and sold after a period of 5 years for R $ 300,000.00, for example, the net profit of the investor will be R $ 50,000.00 - of which taxes and taxes that must be discounted, we will not consider them because they are variable values. To know the profitability of the business in percentage points, the process is also easy: just multiply the sale price by 100, and then divide by the amount paid for the property.

 

In the case analyzed, the solved calculation points out that the return on investment would be 120%. In other words, you received 20% of the property's initial value for profit, a 4% rate of return for each of the 5 years.

 

How to calculate the profit from rental real estate investments?  

The calculation of profit from real estate investments for sale is, in theory, quite simple. To find out what the net return on the application is, you must reduce the initial investment cost to purchase the property from the price at which you sold the property - or the amount you expect to negotiate.

In rental properties, calculating the profit from real estate investments may seem a little more complicated, but it is essentially the same procedure. In this case, you must consider the rental price in lieu of the sale price of the property to make the account.

 

Using the same example of a property purchased for R $ 250,000.00, let's assume that the owner obtained a lease for R $ 1,000.00 per month. By multiplying this value by 100 and dividing by the price paid in the account, we find the result of a monthly return of 0.4% per month.

 

Multiplying by 12 (the number of months in a year), we now know that the annual profitability of the business is 4.8% - more than what was perceived in the example of the sale of this property. With that, we can now calculate the return on investment.

 

We call the return period for real estate investments for lease the time necessary for the return received with the rent to offset the amount invested - that is, the profitability reaches 100%. With the rate of 4.8% profit per year, we divide 100 by this amount. As a result, we concluded that it will take more than 20 years for the rental amount to reimburse the investment cost.

In this case, it is important to remember that your profit should not be considered only on top of the return from the lease, as you still hold the value of the property itself. If you decide to sell this property after 10 years, for example, the return on the rent would not have been able to cover the investment made to acquire the property. Does this mean that the deal was unsuccessful and you lost money?

 

No. Even considering a scenario where the property price has depreciated - although the trend is for the value to remain stable or even to increase in value - your return will still be quite positive. For calculation purposes, we will consider a 10% depreciation in relation to the value of your investment.

 

In this case, you will sell the property purchased for R $ 250,000.00 for R $ 225,000.00. However, over the 10 years that you rented the space, the property was able to generate R $ 120,000.00 in monthly income for you. In this way, your business was a success, with net profit of R $ 95,000.00 - or profitability of 38% of the amount invested initially in 10 years. For this reason, rental property investments are considered long-term investments, as they have the potential to generate income for many years.