Profitability, what is it and how can it be calculated in a real estate investment?

Despite the fact that investments in real estate are more robust compared to other instruments and industries, it is also true that the real estate does not guarantee a “zero risk” scenario.

In this scenario, the firm DD360 pointed out that before investing in a Real estate project it is important to assess the cost effectiveness of the same, in order to have realistic estimates about the terms and possible returns.

“It is essential to access specialists who operate based on technology when you want to invest in the sector. Although the Real Estate it is a solid option for investments, it can never be guaranteed that the profits will come by themselves if there is no correct accompaniment”, can be read in an analysis of the digital platform for financing residential projects DD360.

But, what is profitability in the real estate sector?

According to DD360, it is the relationship between the benefits that will be obtained from the development, the use of a property and the investment made for its construction.

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It is usually expressed as a percentage and allows evaluating the ability to generate a profit from the project.

There are two formulas to define it. The first is the gross profita calculation that considers the expected gross income of the property multiplied by 100 and, subsequently, divided by the total value of the property.

For example, an apartment whose value is 2 million pesos and that will be rented for 10,000 pesos per month; the gross income of that property, per year, will be 120,000 pesos. That number, multiplied by 100 and divided by the value of the property, gives a total of 6% of gross profit.

120,000 x 100 / 2,000,000 = 6

In Mexico City, according to data from Intelimétrica, the municipalities in which it is possible to recover the fastest real estate investment through rent are Iztapalapa and Azcapotzalco, which are around between 7 and 8% of gross profit.

On the other hand, there is the net profitability. Unlike the previous calculation, other expenses and spillovers in the construction process are considered, as well as the costs of maintaining the place.

These expenses are subtracted from the gross income and then carry out the same equation: the resulting figure is multiplied by one hundred and divided by the total cost of the property.

An additional factor to consider, according to DD360, is the financing of a possible mortgage loan, as well as the interest rate, the term of that credit, notary expenses, taxes, insurance and payment of services in the area. These factors can have a major impact on the cost effectiveness from real estate investment.

The use of technology

Thanks to technological developments, there are currently digital tools that allow calculating the cost effectiveness of a property in minutes, through algorithms and artificial intelligence.

Such is the case of Monopolio, a solution with an interactive map that identifies areas with a high level of surplus value and real estate according to their price and potential returns.

This tool has information collected from various sources such as the Ministry of Mobility and digital platforms for buying and selling real estate, to make a projection of future development.