Understanding ROI for Property Investment

KeenToLearn

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Hello,
I am trying to understand the maths behind deciding if a property, an apartment in particular can provide a ROI. I will present some fictional figures below as an example to show my understanding or lack of it.
Id appreciate comments on my approach and understanding of the method.

I realise it may not be possible to get a BLT mortgage with a 10% deposit from any bank now, and that there is alot of risk attached to a highly geared approach to property investment.

CAPITAL COSTS
Property Cost €100,000
Stamp Duty 1% €1,000
Legal Fees €2,500
Building Survey €500
BER Survey €700
Furniture €2,500

Investment Total €107,200
Gross Rent/month €950
Gross Rent/Year - 11 months occupancy €10,450
Gross Yield 9.75%

ANNUAL TAX DEDUCTIBLE COSTS
PRTB (Private Residential Tenancies Board) €90
NPPR (Non Principal Private Residence) €200
Insurance Costs €500
Development Service Costs €750
Property Management Company Fees €950
Household Charges €500
Repairs €500

Total Annual Costs €3,490
Net Annual Income pre Mortgage €6,960 Net Yield 6.49%

TAX DUE
Net Annual Income pre Mortgage €6,960
Interest Relief for first 10 years (75% of 4,000) €3,000
Taxable Income €3,960
Tax Due 42% of Taxable Income €1,663.20
USC 7% of Gross Income €732
PRSI 4% of Taxable Income €158.40
Local Property Tax (100-150k Range) €225
Total Tax Due €2,778.10

CASH FLOW
Net Annual Income pre Mortgage +€6,960
Annual Mortgage on €90,000 @€570 month -€6,840
Tax Due -€2,778.10

NET CASH FLOW -€2,658

Fixed Cost if vacant for a year €9,830
 
I am not sure of the point of your question. Is it a theoretical or a practical question?

A gross yield of 9.75% strikes me as high. But it might be achievable.
Your costs of furniture and maintenance also seem very low.
Your interest is very low.
You will be borrowing €97,000 @5.5% which will be €5,300

Not sure why you have tax relief for 10 years? You calculate RoI on an annual basis.

Summary

Investment |€107,000 |
Rent received|€10,450
less costs |€3,500
Less interest| €5,300
Less tax | €1,600 | 54% of (€10,450 -€3,500 - 75% of €5,300)
Less LPT|€225
After tax return|- €175

This would suggest that if you have to borrow the money at 5.5%, you are unlikely to make a profit. And that is assuming your very high rental yield.
 
I would say that the rental income seems ambitious. From my calculations the ROI (based upon income) given current likely net yields and cost of funds is perhaps 1% and likely less where there are lower yields.

However if you look at total return (income (if any) with capital appreciation) then the ROI could be significant.

Therefore would it be fair to say that ROI on residential investment property is all about capital appreciation?
 
You will not need to pay for a BER as this has to be in place to complete the sale at the prior owner's expense
 
I think that the point of your question is quiet clear. Have you calculated the ROI correctly and the answer is no you haven't.

You have omitted the total interest cost from your workings. The workings are incomplete.

You haven't even calculated your profit. So you couldn't calculate a ROI

Your after tax profit is a loss of €175. As calculated by Brendan above..

The ROI is therefore negative.

You said that the figures were fictional and they do seem a little optimistic.
 
Thanks for all the replies,

Just to clarify some of my assumptions;
The figures are fictional, but I had thought they were close to reality. They were assumed for a 1 bed apartment on the outskirts of Dublin.

The household charge is gone and repairs are low, so if repairs were to come to €1,000, without the household charge, it may be more realistic without the calculations changing.

Interest Relief for first 10 years (75% of 4,000) €3,000
I know this value changes every year and it will start off at over 5k and decrease every year. I picked 4k for my calculation as it will be at or greater than this amount for the next 10 years. I know its not correct but I only used this figure to calculate my tax return value. It will mean that I pay less tax for the first number of years than I calculated but more after the 10 years. My approach here may be totally incorrect as who can guess what tax will be in the future.

For my cash flow, I used the total mortgage repayment of capital and interest. I take from your comments above that I should only include the interest cost of the mortgage payment and not the capital cost for ROI calculations.

My reason for looking at this option is because I am in my early thirties with no pension started. I am building my own house which is 75% completed and paid for with no loans taken so far. I have some savings which will go into the house as will the bulk of my income for the next 2 years.
I would like to start down the path of creating a pension/ alternative income source in the future. I dont want to buy a property to make a short term gain, or to gamble on capital appreciation. I am prepared to put some money aside every month to go into this pension fund/mortgage and am prepared to leave it locked away for a long period of time.
I also realise that interest rates may/will rise at some point and rents may rise a little and then drop back as supply is restored in the future.
I need to understand the figures of how it is decided if an investment is worthwhile on paper before I make any decisions.
 
My reason for looking at this option is because I am in my early thirties with no pension started. I am building my own house which is 75% completed and paid for with no loans taken so far. I have some savings which will go into the house as will the bulk of my income for the next 2 years.
.

Well forget about direct investment in property so.

A pension is your priority after you have sorted out your home and mortgage.

The tax benefits are overwhelming.

Brendan
 
I'd love to know where you can buy a property for €100,000 and get a monthly rent of €950. I'm very dubious about those numbers.

My experience of property investment over the last fifteen years is that without decent capital appreciation it is only a drain on your yearly income. We didn't buy at boom-time prices, we had good deposits on each property, one mortgage is a low tracker rate & we still put money in each year. Yes, we are hoping that eventually they will add to our rubbish private pension schemes but don't let anyone tell you that property investment is easy & profitable.
 
Owing property directly means additional work, between keeping tenants happy, taxes, PRTB, insurance etc. I would say that unless you have a greater than 10% or maybe 15% gross yield that it is not worth the hassle.

In my experience property investment is all about capital appreciation.
 
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