Understanding ROI in the Property Market: How to Optimise your Investment

Mon, Jul 6, 2015

Financial Advice, Investment

Investment is a broad and diverse entity, with numerous channels and products that offer variable returns. Selecting the right one is crucial, as your portfolio must reflect your budget, philosophy and expectations as an investor. This is particularly important for anyone who aspires to invest in property, as there are many different ways in which you can commit your capital within this market.

Regardless of your chosen medium, however, the most important thing to understand is the potential scope of your return on investment (ROI) and the timeframe for this. This will help you to consider investments in detail and determine whether or not they are right for your specific needs.

Optimising your Real Estate Investment: Calculating ROI

With this in mind, the first step will be to identify property investment opportunities that suit your outlook. Short-term investors will most likely prioritise the procurement of run-down or derelict homes, for example, which can be remodelled within a fixed period of time and then resold for a lump sum. Although this may take in excess of a year depending on the scope of the work required, it has a finite end and delivers a single pay-out.

This demographic of investors can calculate their potential ROI by analysing individual modification projects. Simply by factoring in material and labour costs alongside the total value that the work will ultimately add to the property, you will be left with an estimated return. The typical conservatory costs £5,300 to construct, for example, while it delivers an average profit of £5,750 and an impressive ROI of 108%.

While this would be a worthwhile investment for those who can recoup their money quickly, however, it is less viable for private landlords with long-term goals and expectations. This is because your ROI is delivered over the course of an extended rental agreement, meaning that large-scale investments may simply take too long to become profitable. Private landlords must therefore adopt a different approach towards calculating the scope and viability of their ROI, as you list total expenditure and monthly rental repayments to estimate the amount of time that it will take to achieve your goals.

The Last Word

There are two key lessons that we can draw from this. The first is that different types of property investment deliver variable ROI’s, both in terms of timeframes and the way in which profit is accrued. This means that you must create a portfolio that meets your expectations and original budget if you are to achieve your aims.

Secondly, it is important to breakdown your property investment into individual projects. This is because each has their own cost implications and individual ROI, and these may not be suitable for both short and long-term investment strategy. Without this, you may ultimately lose money or fall short of your expectations.


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