How to Accurately Assess Profitability Before You Invest

To prevent successful investors from buying with their emotions, they should assess the profitability of a purchase in detail before committing to putting their capital into the investment. With the current market transitioning into a stable state, it is essential that investors are disciplined with the profitability assessment. This article talks through a guided framework for evaluating deals in detail before the exchange.

What Does Profitability Mean to You

The meaning of profitability can differ from one investor to another; for example, one might see it as monthly cash flow, whereas another may see it as long-term capital growth. It is common that the more experienced investors will use equity from current properties to fund new properties, while others prioritise steady portfolio growth. Depending on what profitability means to you, different performance metrics will be required, and it is important to understand the differences between them.

• Gross yield – the total annual income generated by an investment
• Net yield – the actual, annual percentage return on an investment after subtracting all associated costs from the gross income
• ROI (Return on Investment) – the ratio of net profit to the total cost of the investment
• ROCE (Return on Capital Employed) – measures how efficiently a company is using its capital to generate profits.

How to Analyse Rental Performance

Accurate rental projections are really important to identify a property’s realistic profitability, securing finance and minimising investment risk. If a rental projection is calculated incorrectly, the investor is at financial risk. A rental yield calculator estimates the return on investment (ROI) for a property by comparing rental income to total purchase and operating costs. To be able to complete this calculation, a good understanding of what should be included in the costs is required. The main four things to consider are: mortgage payments, agent fees, maintenance, void periods, insurance and compliance costs.

Evaluate Total Acquisition and Holding Costs

The total cost of a purchase includes much more than just the purchase price. To get a full picture of a property’s profitability, investors need to know and account for the full acquisition and holding costs. The most common costs that need to be accounted for are stamp duty, legal fees, survey costs and refurbishment budget. In addition, holding costs need to be accounted for during renovation periods and if the property is empty, such as mortgage payments, utilities and insurance. By including all of these costs, the investor will be able to calculate the property’s “true cost basis” to gauge a realistic profitability. These calculations should be completed both before any work begins on a refurbishment and after to get a really accurate figure for the ROI.

Seek Professional Advice

Working with a property investment agency will reduce the risk of any property investment, as they are market insight experts and will have all the knowledge to present a good investment opportunity. In addition, they have access to off-market property, offering more opportunities, and they also have more insight into upcoming regeneration projects, which will increase the value of the property. Rather than investors seeing a property investment agency as an extra cost, it should be seen as a tool that minimises risk and maximises long-term returns.

Conclusion

Accurately assessing profitability should be completed in detail with a full analysis to be able to make decisions with confidence and not emotions. Before committing to your next property investment, ensure the calculation is accurate by including all acquisition and holding costs to get a true ROI, allowing you to make the right decision based on realistic figures.