Return on Investment (ROI) is a fairly simple tool which helps determine an investment's performance but is a valuable asset in the long run. ROI gives a clearer idea of performance rather than considering an only monetary return since it takes into account the initial investment as well.
Factors Influencing ROI:
ROI is influenced by some of the vital factors such as the initial investment, loans, overheads, mortgages, and taxes. While calculating ROI, the amount can be influenced by choosing to leave out some of the expenses involved. This is the reason ROI provides only a partial picture of the investment and might not be a perfect meter of its performance.
For ROI calculation on your property, there are some of the main costs involved that you should know:
Acquisition costs
These are the costs incurred when you acquired the property you now want to sell.
- Cost of the property – You paid this price to the seller for the property in question.
- Stamp Duty and Registration Charges –You paid this to the Registration and Stamp Department of the State at the time of purchase of the property
- Brokerage - This is also known as the commission, you have paid to broker for his facilities when at the time of first purchasing of the property. This expenditure might not be applicable for you if you had not taken a broker’s services.
- Home loan interest component – if the property you purchased was financed by an institutionalized bank, you had spent a significant amount as the total interest constituent over the loan value.
Operational costs
These are the costs incurred during the time you possessed the property.
- Maintenance charges –if the property is a flat in a housing society, you have had paid maintenance charges to the respective housing society.
- Property taxes - As an owner of the property, you pay this tax to the particular municipal corporation for the maintenance of utilities and civic set-up, like water, electricity, roads, etc. of your neighbourhood.
- Repair and renovation costs - These include any expenditures made towards maintenances and refurbishments, like changing the plumbing in the washroom, redesigning the kitchen, and repainting the house, etc.
Selling costs
These are the expenses you may have to incur while selling your property.
- Brokerage - The commission charges you have to pay to the broker for helping you sell the concerned property.
- Advertisement - Expenses for printing ads in newspapers, or contributing to the premium package of an online property listing portal. This could form the main chunk of your outflow towards the sale of your property.
How to Calculate ROI?
Cost Method:
- The base formula used to calculate ROI is fairly straightforward.
- Equity/Initial Investment
- Equity = Market Value - Initial Investment
- Market Value, in this case, is the cost that you will be selling your investment for Initial Investment is the complete amount capitalized.
For the most correct ROI figure, include your base investment plus all outlays and associated costs that went into the property from the time of its purchase till the time of its sale.
Here's an example to illustrate the cost method:
Suppose you buy a house for ₹ 50 lakh, spend ₹ 50,000 on refurbishing it, and then spend an additional ₹ 10,000 on advertising its sale.
In this case, the total amount of money put into it is calculated by adding up the initial cost, the money you spent fixing it up, and the money spent on advertising. That is, ₹ 50, 00,000 + ₹ 50,000 + ₹ 10,000 = ₹ 50, 60,000
Now, suppose the market price for this newly refurbished house is ₹ 51, 00,000. This makes your equity ₹ 40,000 (51, 00,000 - 50, 60,000).
Limitations of ROI
ROI does not deliver the most accurate picture of an investment's performance because it can be manipulated by choosing what variables are taken into consideration. It provides a selective and limited picture.
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