Real Estate: Will My Investment be Profitable?

How can you evaluate your return on investment if you buy a property for investment purposes? You must choose the most appropriate method of evaluation and analysis. Here are some common evaluation methods for calculating the return on investment. These can help provide you with additional guidance to make a final decision.

Revaluation

Many people acquire property with the primary aim of seeing the value of the property increase over time. While being a common method, the problem is it does not consider the cash flow the property will generate. And it is necessary to be aware of the real possibility of negative cash flow according to property experts www.chekes.co.uk.

Annual return rate

You can calculate the annual rate of return by dividing the estimated cash flow by the amount of capital invested in the property. Let’s assume you invest £40,000 in a property and the annual cash flow is £4,000. This represents a 10% rate of return. In the real world, this would be a good prospect.

Also, it is possible to buy a property which has a negative cash flow. This is more common with luxury real estate or property in the most exclusive areas of a city. The drawback is that it can take a long time for the cash flow to become positive. During that time the negative cash flow must be covered by additional capital.

Analysing the rate of return, with prudent estimates of income and expenses, can help you invest wisely over the long term.

Internal rate of return and net present value

Alternatively, you can use the internal rate of return and net present value to analyse your property investment. These two methods consider the time value of the capital invested, and both are complex methods. But despite the fact that these methods are commonly used, there is an inherent defect: both calculate a very high rate of return based on the future liquidation of the property through sale. This is an estimation of the price that the sale will achieve. That’s where the problem arises.

An “estimation” is quite simply educated guessing; since anyone can estimate an exorbitant amount for the next 5 – 10 years, which will result in either of these two methods showing the property as a great value investment. The question is: will these educated guesses come true? Unfortunately, it often does not happen.

As we mentioned at the beginning, you are the one to truly determine how good a potential property investment will be. You should always be prudent in the estimates of rents and expenses because it is seldom that a property produces exactly the same economic results as the original estimates. If you intend to invest in property in or around Essex, you should always consult with local chartered surveyors in Essex to ensure that the property you have in mind is free from any structural conditions which might require further unexpected injections of capital, as this too can impact on the profitability of your real estate investment.

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