How to Calculate ROI on Your Real Estate Investments ?

Once you’ve purchased your new house, the goal is to begin reaping the benefits of your investment. There are two ways to track the growth of your money: Return on Investment, or ROI, and Capital Gains.

Return on Investment – ROI

Rental income generates the ROI. ROI records can be generated for a resale property and are an excellent indicator of possible revenue. Return on investment is frequently forecasted for new developments based on existing market patterns and comparable rental records. To calculate the ROI, you’ll need the following information:

  1. The sum of all rental income earned during the year

  2. Total of all year’s expenses

  3. The property’s purchase price

  4. To begin, deduct the expenses from the total rental income to arrive at the net income:

  5. Rental Revenue – Expenses = Net Revenue

Divide the net income by the purchase price in the second step: Net Income/Purchase Price multiplied by 100 equals percent return on investment.

Gain in capital

The capital gain on a property is calculated based on the rise in the property’s value. How much more can I sell the house for than I paid for it initially? Calculating capital gains is trivial in dollar-to-dollar transactions. The capital gain is calculated as the selling price minus the buying price.

When purchasing in dollars in Mexico, two variables must be considered. Not only the purchasing price in USD, but also the Mexican Peso equivalent. While the final factor for foreigners is the amount of money in their bank account, the Mexican government is only concerned with the purchase and sale prices in pesos. Capital Gains Taxes and other levies are calculated in MXN.

Capital Gains Illustration

To calculate your Capital Gain, you must first determine the initial purchase price in MXN as recorded on your title deed and the corresponding sales price in MXN. In the United States, if you purchase a house for USD 100,000 and sell it for USD 110,000 a year later, the final worth is straightforward to determine.

The Difference Between Return on Investment and Capital Gains

The difference between the selling price of $110,000 USD and the purchase price of $100,000 USD is the capital gain of $10,000 USD.

If the same sale occurs in Mexico, the prices in MXN must be considered.

If you purchased the property on September 30, 2018, for USD 100,000, the purchase price would have been $1,867,000 MXN, based on the conversion rate of 18.67 pesos to the dollar. If sold one year later, the sales price would be $2,178,000 MXN, based on the current exchange rate of around 19.8 pesos to the dollar. Capital gain would be calculated as follows:

$2,178,000 MXN – $1,867,000 MXN = $311,000 MXN or approximately $15,707 USD in capital gain.

Why is this significant if both transactions take place in US dollars? Capital gain taxes will be calculated using the increase in peso values; hence, your capital gain tax will be calculated using $15,707 rather than the actual USD 10,000 increase in the sales price. It is critical to take this distinction into account when calculating the worth of your investment.

Which is more significant, the return on investment or the capital gain?

In an ideal world, we would all like to own a property that generates a high rental income and appreciates rapidly in value over time. Your purchase is more likely to grow in one of these categories. Units with a high rental income are frequently located in established neighborhoods with little new construction and are conveniently located near amenities and attractions. Properties that appreciate swiftly are frequently located in new developments that do not provide as much rental income.

If it is impossible to find the “Golden Goose” that yields a high ROI and a high capital gain, it is critical to strike a comfortable balance between ROI and capital gain.

For more information on investing in a property in Mexico, call HOMIA Real Estate and arrange for a personal tour guided by one of their professional agents. Bear in mind that at HOMIA, we make things happen!

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