Return on investment: the number one metric to make an accurate buying decision in property!
Return on Investment (ROI) calculation tells you how hard your money is working for you. If you were to invest R100 000 and make R10 000, then you ROI would be 10%. You take the profit you made divided by the money you invested, (R10 000/R100 000) * 100 = 10%.
This metric tells you whether your money should be invested or not. Every investor is different, and you need to decide what ROI you want to achieve. A good way to look at ROI is to compare it to your interest rate at the bank. Currently, I’m receiving about 7% on my market link account, and I’m sure you’re receiving something similar. Most banks are giving between 5% and 8%.
If the projected ROI of a deal is 5%, would you do the deal? Of course not. You could put your money into a risk-free savings account and receive the same ROI. A property transaction could go horribly wrong and there is no risk in having your money in the bank. If a deal brings you a ROI of 20%, then it makes sense to take your money out of the bank and put it into a deal.
Again, the percentages aren’t a standard and it depends from investor to investor. I prefer a ROI of 12% or more for buy to let, 15% or more for a capital flip and 18% or more for a multi-let. These are figures that I like to work with and as an investor, you’ll find your own success metrics. The important thing is that you are using logic and maths to make decision, instead of emotions.