How to Calculate RoI on Your Commercial Property?
Commercial properties are assets people build or buy to seek returns via rent, lease or sale. Many investors, who look to gain lump sum returns, opt for the third option, which is selling the property. So, they buy properties with a ballpark calculation about their returns in mind. It helps them make buying decisions. But how to calculate commercial investment RoI? Here’s a blog that can help.
What is Return on Investment (RoI)?
In simple words, return on investment is the actual profit you make on that investment. It is often estimated as a percentage of the cost. In real estate, wherein a property forms an asset, you must calculate the RoI before you invest.
Of course, a specific return is never guaranteed. One can never quote a particular amount as return, as various external and internal factors influence it. Thus, a return on investment is an estimate or an approximate amount that lets you evaluate the property’s potential from the investment perspective.
Costs to Consider While Calculating RoI of Your Commercial Property
You buy a property for Rs. 2,00,000 and sell it for Rs. 2,50,000. Thus, your net profit here is Rs 50,000. This is a pretty straightforward calculation, where simple math can help you compute the RoI. But real estate calculations aren’t always and
necessarily as straightforward. You must consider various costs while calculating your commercial property’s RoI to make an informed investment decision.
- Property Acquisition Costs
These costs include the following.
- Property’s actual buying cost
- Stamp duty and registration charges
- Brokerage, if any
- Loan interest (if you have financed your property via a financial institution)
- Operational Costs
Operational costs include the money you’ve spent while owning the property.
- Property taxes (water, electricity, municipal taxes, etc.)
- Maintenance charges
- Potential periodic upgrades (painting, fixtures, etc.)
- Selling Costs
If you have a fixed buyer lined up to buy your property, you might not incur these costs. But if not, you may hire a broker and invest in advertising the property.
- Brokerage
- Advertisement (Digital, printed, online property listings, etc.)
How to Calculate RoI in Real Estate?
Let’s consider two examples in this regard – a simple and a complex one.
Example 1
So, you’ve purchased a commercial property in Pune for Rs. 20 lakhs in 2020. Now, you’ve decided to sell it off in 2022 at Rs. 30 lakhs. For this example, let’s not factor in any of the above costs. Considering the selling price, you’ve calculated a RoI of 50 percent on the property. In other words, you are earning Rs. 10 lakhs on the property, over and above your purchase price.
How will you calculate the estimated RoI on this property.
RoI = investment’s current value – cost of investment / cost of investment X 100.
RoI = 30,00,000 -20,00,000 / 20,00,000 X 100
Thus, RoI = 50 percent
If you receive bids from about three buyers, calculate the RoI for each to determine the returns each one is offering. Take the price offered in the investment’s current value variable and determine the RoI in the above manner.
Example 2
You’ve purchased a commercial space in Pune for Rs. 10 lakhs in 2020. Now, you’ve decided to sell it off in 2022 at Rs. 15 lakhs. You haven’t borrowed any loan against this property. However, you’ve incurred maintenance charges, brokerage, and remodelling charges for the property.
RoI = 15,00,000 – (10,00,000 + 2,00,000 (maintenance, brokerage, etc.)) / 12,00,000 X 100 = 25 percent.
So, the RoI in this case is 25 percent.
Since you’ve decided to sell your property in two years, you will be subject to paying short-term tax. As tax payment will directly impact your profit, you must factor in taxes as well while quoting the property’s selling price.
We hope this blog could give a fair understanding of calculating RoI on your commercial property in Pune. If you are looking for commercial properties in Pune or near Pune, consider buying it at Kohinoor World Towers (KWT).
KWT is a massive upcoming commercial project with various multi-sized offices, new-age amenities, a promising location and an incredible connectivity. Call +91 20 6764 1818 or write to sales@kohinoorworldtowers.com to know more.
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