- It takes 8-10 years to recoup the money spent on purchasing an apartment in Kenya. But short-term rentals tend to have a shorter recouping period.
- Return on Investment is usually affected by market unpredictability and operating costs.
- Calculating the return on the investment beforehand will save you from investing in a money pit.
When you invest in a property, the last thing you want is to spend money on a house that will not make you a profit. As part of your pre-purchase research, you should also calculate the projected return on investment.
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How Do You Determine the Investment Recoupment Period
The most basic way of calculating Return on Investment (ROI) is to calculate how long it will take to earn back the money you spent buying the house.
For instance, if you were to buy this apartment in Kilimani for Ksh 7.5 million inclusive of closing costs and you rented it out for Ksh 125,000, it would take you 60 months or five years to recoup the purchase cost.
Recoupment period= Purchase price÷Rental income p.m
7,500,000/125,000= 60 months
To calculate the ROI percentage, use the formula below;
ROI = Rental Income p.m ÷ Total Investment *100
ROI = 125,000/7,500,000*100= 1.6% per month
The typical rule is, your rental property should be able to earn at least 2% of its purchase price per month. Anything below that is not considered a good investment.
However, there are other ways to earn back your investment capital, such as capital gains when you sell the property. If you buy a property to hold and then sell when it appreciates, the lower rent should not deter you.
But you also need to consider the future of your property area to determine if there are chances of your apartment appreciating. Fortunately, all properties do appreciate eventually due to inflation and other factors.
Factors to Consider When Calculating Return on Investment
You need to factor in the running costs of repairing any damages in the unit, renovation costs, taxes, all the months it may lay vacant, and other unprecedented expenses such as expensive repairs or replacements.
To do this, you need to guestimate the total cost of your potential liabilities and deduct it from your anticipated rental income. The balance after all these deductions is the figure you should use to determine the ROI.
Your expected expenses are Ksh 45,000, and your net income will be Ksh 125,000- Ksh 45,000. Giving you a Net profit of Ksh 80,000. This then gives you a recoupment period of seven years and ten months (94 months).
Recoupment period= Purchase price÷net profit p.m
7,500,000/80,000= 93.75 months
The amended ROI will be as follows;
ROI = Rental Income p.m ÷ Total Investment *100
ROI = 80,000/7,500,000*100= 1.06% per month
This return is fairly low. But since Kilimani is a fast-developing zone, you will recoup your invested funds when you sell the apartment at a markup.
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