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How to Calculate the Return on Investment (ROI) of a Rental Property’s

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Real estate investors, understandably, want to know what the typical return on investment in their location is to fully understand their returns. This makes one wonder: what is the average return on investment in real estate in Ethiopia?

Investing in real estate, and more specifically in rental properties, can be one of the most lucrative and safest investments people can make. With long-term appreciation when the value of the property grows over time, a monthly cash flow, and tax advantages, owning and operating rental properties will increase your wealth, so you can save for retirement, life events, or other reasons. It might seem intimidating to know where to start, but rental property investing is for anyone and everyone — no matter your age or experience. 

In this informational blog post, we will discuss what the average ROI for your rental property is and how to calculate it.

Types of Properties to Invest In

For those new to real estate investing, rental properties can be single-family homes, apartment complexes, townhouses, duplexes, multi-family apartment buildings, commercial areas, and more. The main advantage of owning and renting out a property is the monthly cash inflow from rent payments — many argue it’s one of the safest investments you can make. Another bonus is that landlords can decide if they want a long-term or a short-term rental.

When you invest time and money into a property, getting the best possible return on your investment is the main goal. This might mean opting for a long-term rental instead of a short-term rental or vice versa. Short-term rentals are becoming very popular as an alternative to pricey hotels in vacation destinations or high-tourism areas. On the other side, long-term rentals provide more stability and consistency with year-long leases and committed renters.

The adage “location, location, location” is spot on when deciding what direction you are going to take with your rental property. Addis Ababa is the most lucrative location to invest in long-term rentals in Ethiopia.

Potential Advantages of Long-Term Rentals

Long-term rentals have been the traditional option for property investors for a variety of reasons, including:

  • Longer lease length: Having a consistent deadline and year(s) for -a long lease will ensure you always have someone on your property paying rent.
  • Less advertising: With a long-term rental property, you will only need to advertise when your tenant leaves.
  • No utility payments: In a long-term rental, contrary to short-term rentals, the tenants are responsible for taking care of their electricity and water and other utility payments.
  • Tenants are responsible for basic maintenance: Long-term renters can generally keep the house clean, complete yard work, and do minor repairs around the house.

Metrics to calculate the potential of ROI on real estate? 

Now, you’ve found a potential property that you think would be perfect for rental, how do you know if it’s a good investment? That’s where calculating the ROI comes in. Here are the basics of what you’ll need to calculate the ROI:

  • Property Details: This includes the property value, property repair costs, square footage, and the number of bedrooms. Metropolitan Real Estate offers 1 to 4-bedroom apartments that meet international standards with high-end finishing materials from Turkey and Europe and are supervised by experienced Turkish site engineers to exceed your expectations.
  • Mortgage Details: This would be the loan terms, down payment, closing costs, and interest rate. Metropolitan Real Estate’s high ROI ambition for our buyers would be impossible to achieve if you bought with a load and paid interest to the bank for the rest of your life. The ideal solution we offer is a down payment starting at 35% with optional and long-term payment plans till you receive your key. This allows you to flip your money and increase longer time and earnings to pay your additional payment based on the progress of our construction.
  • Rental Income Details: Calculate what the monthly rental income would be, other monthly income, and the anticipated vacancy rate percentage. Metropolitan Real Estate Apartments are unmatched investment opportunities that will yield you (as of 2023) $3000 to $4500 per month if rented out. In addition to a high rental income, you will enjoy a premium lifestyle and property ownership, which will make you wealthy in a matter of years.
  • Monthly Rental Expenses: You need to know what your monthly maintenance, monthly repairs, monthly utilities, monthly Home Owners Association (HOA)/dues, and property management costs will be. No Worries! When you buy apartments from Metropolitan Real Estate, you won’t have to worry about unexpected maintenance and repair costs because we imported high-quality elegant finishing materials from Turkey and Europe. After you receive your key, Metropolitan will support you in establishing an HOA, and property management will manage the rest.
  • Annual Rental Expenses: These will be the annual property taxes and the annual insurance cost. Rental Income Tax is one of the taxes being recently enforced in Ethiopia. Even though it has been a long time since it was included in the income tax proclamation, it was started to be strictly enforced especially on individual homeowners who rent out their property not more than 2 years ago.
  • Knowing all of these details about a potential rental property will help you decide if it will be a good investment that aligns with your investment goals.

How to Calculate the ROI

Once you’ve gathered all the important information regarding a property and you are ready to calculate the ROI, below are some important figures you will need to calculate.

• Net Operating Income (NOI): The net operating income or NOI represents how profitable your investment is. It can be calculated by subtracting the gross income from your operating expenses for the property. However, research conducted according to past Sarbet Gebrel and Mid-Town luxury real estate buyers, their average rate of return has ranged between 2 and 8 years.

• Cap Rate: This is also known as the capitalization rate, which helps you quickly gain insights to compare rental investment opportunities. It represents the rate of your return and can be calculated by dividing your NOI by the price of the property.

• Cash-On-Cash Return: This represents the return that is expected from what you invest in the rental. To find out what this number is, you can divide the after-tax annual cash flow by what you paid to purchase the property.

• Annual Gross Rent Multiplier: This is also known as the GRM and helps measure the value of the rental investment. For example, it can help you see if the asking price is reasonable. To calculate the GRM you divide the total sales price by the annual gross rent.

• Annual Cash Flow: Annual cash flow is calculated by the net operating income minus debt. This is how much you will profit (or lose) from your rental annually after all expenses and mortgage payments are covered.

ROI = (Yearly Rental Income – Yearly Rental Expenses) ÷ Property Price

What is the average ROI on real estate?

A good average annual return on investment for residential real estate would be higher at 7% to 10%, and you also have the benefits of inflation working for you, tax benefits range. This would be the total ROI on funds invested i.e., cash flow plus equity growth. Residential real estate allows higher returns due to manufactured equity and the ability to increase yields. 

Above-average ROI of more than 25% is a golden return! 

Currently, just in the last six months alone, our Westview Standard Apartments’ Buyers’ profits are over 40% in the dollar.

Final thoughts

Sometimes a property might look great and seem like an ideal rental, but it might have hidden fees and expenses. Read our blog to know more about Hidden Fees and Cost Of Purchasing A Home you hadn’t thought about —that’s why analyzing your return every time you invest in real estate is a good idea. As you begin your landlord journey, keep a property’s profitability — as well as your Real estate investment strategy — top of mind and you should see a positive ROI from your rental portfolio.

Bottom Line

Let us connect today to start investing and growing your wealth! On Metropolitan Real Estatewhich has multiple ongoing projects such as The Metropolitan Tower at Bole Rwanda in front of Mamokacha cafe. Metropolitan Central Tower Luxury Apartments are around AU headquarters. Metropolitan Westview Standard Apartments is located at Total Soset Kuter Mazoriya and  The Metropolitan Residence is located around Bole Main Road, In front of the Mega Building. 

Contact us at the Ethiopian office: +251 973 40 40 40 and the USA office: +1 480 280 22 42. 

Reference – Forbes Biz Council


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