YIELD VS. IN HOW MANY YEARS YOU GET THE ROI
YIELD and payback period: the two put together are the inverse of each other.
Mathematically, the payback period is 1/Yield and conversely, the yield is 1 / payback period. Yield is usually expressed as a percentage and payback period as a number, which is the number of years.
Most Romanians, when they enter into a real estate investment, wonder how many years they will recover their investment.
It has entered the popular language because it is simple to understand and pass on and it is easy to compare with other asset classes. For example, you’ll often hear “In x years I get my investment out. I say it’s good” in reference to a business, real estate or any other asset.
Unfortunately, this approach often has some structural flaws.
Specifically, they will say: “I got this apartment for 100.000 Eur. I rent it for 500 Euro. I’ll get my money back in 16 and a half years”. If you multiply 500 Eur by 12 months and then divide the 100.000 Eur total investment by the resulting 6.000 Eur, it really gives you 16 years and a half.
Nothing wrong with this calculation. The problem is that you jump too quickly to multiplication and division because it’s easier to understand and transmit that way.
But there are costs associated with this, which if you don’t take into account are likely to turn enthusiasm into disappointment.
To the 500 Eur you have to apply tax on rental income (for individuals it is 6%) + a maintenance and repair cost that some professionals estimate between 5 and 10% of the rent depending on how new the property is. In addition, you have to take into account who is managing the property and the lease during the years of payback (those 16 years initially calculated). If you do it yourself it is theoretically simpler because, apparently, you don’t have to calculate it, although it would be correct to calculate a cost of the time invested in that activity.
In our experience, if you give yourself 16 and a half years on the gross calculation where you don’t take into account the costs, most likely, the real, net, you will actually recover the money invested in 20 years.
Is 20 years a long time, a short time? In Yield it would translate into 5% (1 over 20).
That’s about where it should be, being passive income. In addition, keep in mind that in those 20 years, if the rented property was chosen according to the right economic criteria, it is quite likely that its value will increase. Our estimate is that it will even double. At a relatively small increase of only 3.5% per year in 20 years your property will double in value.
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