How To Calculate ROI For Rental Properties In Nigeria

One of the most profitable and secure investments in Nigeria is undoubtedly in real estate, especially rental properties. With a guaranteed return on investment (ROI) and yearly cash flow, owning rental properties can significantly boost your wealth, which ultimately contributes to your overall financial goal.

While rental property investment is accessible to everyone regardless of age and experience, it may seem a little bit intimidating. One of the biggest challenges faced by people with interest in such investment, especially in a city like Abuja, is finding the right property and ensuring Return On Investment (ROI).

Let’s discuss the basics of rental property investment and how to calculate the return on investment (ROI).

What Are The Types Of Properties To Invest In?

For new real estate investors, rental properties includes single-family homes, apartments, duplexes, townhouses, terrace and just to mention a few. The main advantage is the yearly cash flow from rent payments, making it a safe investment.

Knowing your budget and investment strategy is important as you begin your landlord journey, which will help you calculate the ROI accurately. For instance, consider whether you want to renovate or fully furnish the property.

What You Need to Calculate the ROI

Once you find a potential rental property, determine if it’s a good investment by calculating the ROI, which measures profitability relative to its cost.

Here’s what you need to calculate the ROI:

• Property Details: Property value, repair costs, square footage, and number of bedrooms.
• Mortgage Details: Loan terms, down payment, closing costs, and interest rate.
• Rental Income Details: Yearly rental income, other monthly income, and anticipated vacancy rate.
• Yearly Rental Expenses: Maintenance, repairs, utilities, HOA fees, and property management costs.
• Annual Rental Expenses: Annual property taxes and insurance costs.

How to Calculate the ROI

The goal of every investment is to make profit. And as an investor, it is important you know how to calculate the returns on your investment to help you determine the profitability of a property.

The first method involves calculating the duration required to recover all incurred costs, including the cost of the acquisition of the property. For example, let’s say the cost of buying a property is 100 Million Naira and the property generates an annual income of 10 Million Naira, it will take you a period of 10 years to recover the capital investment.

With the above example, a 100% return on investment for a 100 Million Naira property will only be possible in a minimum of ten years – with the assumption that no further costs (i.e maintenance costs) are incurred within the stated period.

However, in situations where additional costs are incurred, the additional costs will be added to the total value of the property and the percentage will be calculated in relation to the new sum.

OTHER WAYS TO CALCULATE ROI

You can also calculate the returns on a property annually. For instance a property is acquired for 50 Million Naira, and the property generates an annual rental income of 2.5 Million Naira. It can be concluded that the ROI for such property is 5%.

If the said property then appreciates by 10%annually while still generating annual rental income of 2.5Million Naira, the total ROI for such property will then be 15%.

A good ROI for a rental property is typically above 10%, but 5% to 10% is also acceptable. There is no definitive answer, as different investors take different levels of risk. Knowing your budget and analysing potential returns is important.

As a rule of thumb, it is believed that a good investment in real estate would require a maximum of 20 years to recover the capital investment – either via rental income or otherwise. 

Nonetheless, experts have discovered newer investment methods that allow investors to recover their capital investment within a period of 7 years or less. 

Would you like to take advantage of this opportunity? Our investment advisors are willing and available to guide you through your next investment journey, to ensure that you make a profitable investment without leaving money on the table.