Return on investment in real estate
Return on investment in real estate
In this article, we will tell you what features are taken into account in the design project, and how they affect the return on investment.
The design project olgadesign.it takes into account many features that will increase the profitability of the customer's investment in real estate.
Before offering a service to customers, we have done it for ourselves. We have repeatedly bought property, made design projects, carried out reconstruction, rented property and studied the results. Having achieved good results and gained vast experience, we offer the same for the customer. We confirmed the indicators and conclusions described in this document in our investment and construction projects, having gained experience in all stages of this process from the idea of purchase, plans, selection of builders, repair, control, to sale.
Profitability of the entire real estate deal depends on
Profit from the sale - Cost of investments
Profit from operation - Cost of operation
To get a positive result in paragraph 1, you need to understand what characteristics of the property affect the value.
The ability of real estate to generate income, income-generating real estate is more expensive than usual.
Energy class. As higher energy class, as more expensive the property.
The level and quality of finishes and household appliances. As more modern and beautiful the finish, as more expensive the property.
Accordingly, the investment potential will have the property that at the time of purchase has low rates, and by the time of sale it is higher. In order to realize this potential, it is necessary to take actions to increase these indicators.
To get a positive result in paragraph 2, you need to understand what characteristics make up income and operating costs.
The income depends on the profit from tourist rent, which is depends on:
The level of comfort of the tourist, equipment, modernity and aesthetic beauty of the apartment. For example, good hotel rooms are always designed by a team of professional designers. These rooms are comfortable and convenient, as well as beautiful, they are made using quality materials and are fully equipped technically. Therefore, renting them is expensive and brings a lot of income to the owners.
From the number of days in a year in which the property is rented by tourists in relation to the days when the property is empty.
Costs depend on all costs associated with the provision of tourist rentals
From the cost of administration. Man-hours that the customer or its administrator must spend in order to rent out the property.
From the cost of utilities for heating, cooling, water supply and so on.
From the cost of maintaining the property in a functioning state. This is a home renovation.
From the rate of depreciation of the finish, if the finish is not of high quality, it will wear out quickly, which leads to costs.
When a property generates income, then without any mathematical calculations in the head of a potential buyer, it acquires a greater value compared to no income, this is obvious. However, this is also clearly visible in the numbers. The conversion of real estate into income allows you to apply a different valuation method to it, based on the annual net profit and the bank rate.
For example:
Just an apartment with a good new finish in the historic center with an area of 120 m2 costs about 430,000 euros. Their evaluation takes place exclusively in two ways, costly (how much it costs to create such apartments from scratch) and market (how much buyers like them and how much they are will be ready to pay for them).
For income-producing real estate, the income method of valuation based on the bank's rate or a similar indicator can be applied.
If we divide such apartments into 2 independent parts, improve the engineering systems by allowing them to work separately for each of the parts, automate the process of entry and exit of tourists, as well as perform other necessary actions, then we can calculate how much a year such apartments can generate income: 24,000 euros (calculation is presented below). Instead of the bank rate for calculation, it is more correct to choose US Government bonds with a maturity of 10 years, a yield of 3% as a benchmark for the level of return. Based on this method, the value of the property is calculated using the following formula 24000/0.03%=775200 euros
The difference with a normal apartment is 345000 which is 80%.
Please note that in order to achieve these indicators, you certainly need to spend money. But at the same time, the income of such real estate within 5 years will be about 120,000 euros. This income is able to fully compensate for the costs.
Calculation:
3 months 90% of the days are filled, the cost is 150 euros per day; 4 months full 70% days, cost 110 euros per day; 5 months full 45% days, cost 70 euros per day. Each independent part of the apartment will bring 27,000 euros, together they will bring 54,000 euros per year.
Airbnb costs around 3% depending on the tariff. Utilities about 5600 euros per year. Taxes 22%. Administration about 7000 euros per year. Other taxes and fees about 2000 euros per year. Unforeseen expenses 3000 euros per year.
Total minus expenses: 24,000 net profit per year.
The most important feature that affects the cost is the division into two independent parts, it is this feature that requires careful planning and design in the first place.
Based on the data published by Immobiliare.it, it is assumed that a two-room apartment of about 65 sq. m, located almost in the city center, class A will cost more than a class C apartment. In Florence by 29%, in Rome by 21%, in Milan by 18%. The price difference between class C and class G is 15% in Turin, 12% in Milan and 8% in Rome (facileristruttgere.it).
Thus, as the data show, the increase in value is indeed significant.
The most important factor in increasing profitability is to increase the number of days a year when there is a rental. Most apartments and hotels are closed out of season. Although there is a demand for them. However, the demand is reduced and this forces the price to be reduced. At a certain point, income ceases to pay for heating costs. It is necessary to be able to work, making profits at a lower rental price, this directly depends on the energy class of the property. Otherwise, half of the year will not generate income, but only losses.
The energy class depends on various factors that are taken into account in the design project. The quality of windows and doors, the insulation of external walls and ceilings, the efficiency of the heating system. The energy class is highly dependent on the control system, which is called Smart home or Domotica. And also from the availability of efficient sources of heat, cold and systems for saving heat and cold.
Modern gas boilers require underfloor heating or large radiators, underfloor heating is not very effective for tourist rentals, and large radiators must be properly located. All this is taken into account in the design project.
Modern electric heating requires the location of many systems, solar panels, heat pumps, wells in the ground. Such systems are effective when they work for several apartments or a whole house at once. But if the apartments must be independent, in order to take into account the consumption of each of them, it is necessary to take into account in advance in the design project the laying of communications throughout the facility in the right way and the location of individual consumption meters.
Modern ventilation allows you to ventilate the room while keeping warm or cool. Before the air is expelled from the room, heat is extracted from it, which is transferred to the fresh air that is pumped into the room.
All these modern and expensive systems are completely worthless if used without mind. For example, open a window and turn on the heating. Or the cleaner will forget to turn off the heating after cleaning while the apartment is empty in winter. Or the ventilation will operate at full capacity when no one is at home. In the case of tourist rentals, when the owner is not around to check everything, and all bills go to the owner and not to the tenant, then these problems multiply and the costs for the property owner multiply.
The smart home system will allow you to automatically control some scenarios, monitor open windows, understand that no one is at home, heat the room smoothly and in advance, which is both comfortable and economical. And also, it will allow the customer to monitor and control the main indicators remotely via the Internet. Allows you to provide access to real estate by digital code or plastic card. This is important for the ability to receive a tourist at any time, or organize cleaning. Unlike classic combination locks, smart locks allow you to change the code remotely. Otherwise, every tourist will be able to get into the house at any time after the end of the rental period.
Finishes and appliances must be of sufficient quality to allow the customer to operate the property for 5 to 10 years and keep it in good condition. To be able to sell the property after that at a good price. Finishing should not deteriorate much. Finishing should be such that it can be easily updated before selling, giving a feeling of new for a small investment. And during operation, equipment, decoration, windows, etc. should fail as rarely as possible, because constant minor repairs create a huge number of problems. A broken mixer in the kitchen at the height of the season will make it impossible to rent out the entire apartment and it will be urgent, which means it will be expensive to replace it. It is also very important that the style and appearance of the property does not become outdated during all this time and looks modern even after 10 years. Therefore, at the initial stage, it is important to take this into account and make a design project.