How to Assess the Cost and ROI in Real Estate Investments

When it comes to assessing the cost and ROI in real estate, understanding the financial breakdown is key. Here’s a step-by-step guide on how to calculate the potential income and return on investment (ROI) for a property, using a practical example.

Step 1: Compare Prices Using Booking.com

Start by getting a sense of the market rate for property rentals. Use a tool like the Booking.com app to estimate daily rental prices. For instance, if you’re looking at a property in Canggu, Bali, here’s how you can do it:

1. Open Booking.com on your smartphone or computer.
2. Set the destination to Bali, Canggu.
3. Apply the filter for 5-star properties.

After applying the filter, you’ll find the average daily rental price is approximately $169 per day. This translates to $5,068 per month or $60,816 per year.

Step 2: Calculate the Costs

Once you have the rental income, you need to factor in the costs associated with managing the property.

Marketing Costs:

• 15% of your rental income goes towards marketing and booking fees (via platforms like Booking.com), which amounts to $9,122 annually.

Taxes:

• In Bali, taxes are 11%, which equals $5,686.

Management Costs:

• A management company typically takes around 30% of the rental income. This would amount to $13,802 in management fees.

Net Income:

After taxes and management costs, your net income would be approximately $32,200.

Step 3: Calculate the ROI and Cap Rate

To determine the profitability of your investment, you’ll calculate the ROI and cap rate:

Rental Income (ROI):

• Let’s say you bought the property for $200,000.
• If your annual net income is $32,200, divide $32,200 by the property price of $200,000.

This gives you a 16% annual return (cap rate). This is significantly higher than the average international capitalization rate, which is around 5%.

Payback Period:

• To see how quickly your investment will pay off, divide the $200,000 purchase price by the $32,200 annual income. This results in a payback period of 6.5 years.

Step 4: Income from Sale

In addition to rental income, you can also evaluate the potential income from selling the property:

• The estimated market value for this property could potentially double over time.
• On the secondary market, the property could be sold at a 30% higher price than the purchase price, increasing its resale value significantly.

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