How To Easily Calculate The Return-On-Investment (ROI) For Rental Properties
Updated on April 21, 2015 by Jay Castillo 72 Comments
As promised, I shall be sharing in this post how I calculate the Return-On-Investment or ROI that I could get for a property. To better illustrate the computation, we will use an actual example which I earlier introduced in Pre-auction bids – Another lesson learned.
For this example, I shall be using the buy-and-hold strategy as the property shall only be rented out. I personally favor properties that are profitable as rental properties because this strategy is actually the last resort in case a property takes too long to sell.
Here are the assumptions we shall be using: A small condo unit with an area of 22sqm is being sold for only Php14,000/sqm or about Php308,000. According to the bank agent, rentals of studio units in this area of Makati are between P8,000 to P10,000 per month. For this example let’s use the more conservative estimate of P8,000 per month or P96,000 per year.
If I decide to hire a property manager, property management costs would be around P1,000 per month or P12,000 a year.
Let’s also build a maintenance reserve fund at P1,000 a month or P12,000 a year.
For rental properties, never assume that a property will
always be tenanted 100% of the time so for this example, I shall be using a conservative assumption of 1 month of vacancy per year.
Real Property Taxes are estimated to be around P9,000 per year.
Lastly, property insurance would be around P1,000 per year.
As I have mentioned in Five Things to Consider when Buying Foreclosures. Capital Gains Tax and Documentary Stamps Tax (DST) should also be considered as these are very significant just in case these are for the account of the buyer. For this example, CGT and DST are for the account of the seller so there is no need to include them.
Scenario 1: I shall pay in cash
The Annual Net Income would be as follows:
Annual Rental Income——-P 96,000.00
1 Month vacancy—————–(8000.00)
Real Property Tax—————(9,000.00)
As mentioned in the book “Think Rich Pinoy!” by Larry Gamboa, you calculate the cash-on-cash ROI by dividing the annual passive income by the money you have out at the end of the first year or the Total Cash Invested which is equal to the selling price of P308,000 as I decided to pay in cash for this example.
ROI = Net Income / Total Cash Invested x 100%Source: www.foreclosurephilippines.com