Good day,
Following the last two editions on how to buy the right property, today we sail into the last and rarely taken note of – the economics!
So you’ve checked the seller out – tick.
Checked the land is legitimate – tick.
Now is the time for us to waddle into the economics of it.
Why are you buying that particular piece of property, anyway? What is your objective? Can you meet your objective by buying a different property? Or buying non real estate? For many this will be nerve wrecking as it involves deep thinking, wide consultation and probable long projections – we call it the economics of real estate.
Pick up your calculator, a note book a pen and your favorite drink and lets start:
1. ROI also known as return on investment: The most basic but very telling formular for property calculation is ROI especially property with income.
You simply take what you intend to gain as investment subtract it from what you spent and then divide that by the cost and multiply by 100% to get ROI
ROI = (Gain from investment – cost of investment)/cost of investment. For example if you invested 10million in rental units and in 3 years time you obtained 15million your ROI would be (15 – 10)/10 = 5 multiplied by 100 to get 50%. So use this to compare different investment options before you sink in your hand earned pesos.
2. Pay back period: Generally refers to the length of time it takes an investor to recover your money. If you spend 100million on a rental property and hypothetically rent per annum is 10million. It would take 100/10 which equals 10 years to recoup your investment. The rule of the thumb for real estate is 8 years. This essentially means you should aim at getting 1% per month for the amount invested. So in our example above 1% of 100million is 1million per month.
These are the most basic two that anyone can apply.
In the local context however, other variables also should come into play;
Location of the property, Layout, and Amenities.
Location: At the macro level for example areas like Kololo might be a no-brainer. But in Kololo itself (or at the micro level), some roads in Kololo are more prized than others.
So look for the best in the location you choose. A corner plot for example in a newly cut estate might prove more strategic in the future as a commercial property than one inside which might be better suited for residence (if you love quiet).
Layout: The more regular (square, rectangular) the plot is, the better in terms of planning, costing and beauty.
Amenities: Schools, hospitals, religious centres, etc. All these have the power to raise property prices. Whether by starting business around them or simply proximity to them. So both at the micro and macro level, search for these.
If you have any question, you are welcome to shoot.
