Cash Flow and Return on Investments are two major words in any Investor’s dictionary. Investors pay a lot of attention to these terms as they determine the viability and profitability of any Investment
In this article, we will be exploring how to calculate cash flow and returns on investment for different asset classes in a Real Estate Investment Portfolio namely Landed Property, Rental Property, and Buying to Sell or lease either on short term or long-term. Stay Tuned
Now let’s talk about calculating cash flow and return on Investment on Land. Land in itself does not offer cash flow to holders except in a case where it is developed into a building. To calculate the return on Investment on land, what you have to do is (Sell Price – Buy Price)/ Buy Price multiplied by 100. Of Course, this should be discounted by the current Inflation rate at the time of computing
For Example. If you buy a Piece of Land at N2,000,000 and resell for N6,000,000 and the current inflation rate is 12%. Your ROI would be (N6,000,000- N2,000,000)/N2,000,000 X100. That gives you 200% returns but if you discount at 12% inflation rate which is (1- 0.12) = 0.88 multiplied by 200% and you have 176%
In mathematical terms, your ROI should be 200% but going by real economic situations where you always have to account for inflation, the Return would be reduced to 176%
Let;s talk about calculating cash flow and return on investment on rental property. A Rental Property on the other hand would pay cashflow to its holders throughout its holding period. The Net cash flow would be calculated as Income less operating costs
Return on Investment on the other hand is calculated by Dividing Net Income by Purchase price X100
For Example if an 4 Bedroom Terrace in Lekki costs N80 Million, the annual rent is N12 Million the owner incurred about N1.2 Million in a year to put the property in good shape and maintenance and current inflation rate was 10%
Annual Net Cash Flow would be N12 Million – N1.2 Million which gives us N10.8 Million. Discounted at the Inflation rate for that year would be N10.8 Million X 90% and that would be N9.72 Million
Return on Investment on the other hand would be N10.8 Million/ N80 Million X100 and that gives us 13.5% ROI yearly. Discounting and Accounting for Inflation would bring ROI to 13.5%X 0.90% that is 12.15%.
On the other hand if you buy a property with the intent of reselling say like an off plan property. In this case, you would normally spend a bit of money to fix up or renovate the property.
If you bought the property at N30 Million, spent N5m on Refurbishing and sold at N50m the following year. You can determine the return on Investment as follows
You incurred a total cost of N40m and sold at N50m so your profit in absolute terms is N10m
Returns on Investment would be N10m divided by N50m divided by 100 and that gives you 20%
of Course, you would have to account for the current inflation rate to give you an accurate calculation.
