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02.11.2022
Reading time: 2 minutes
Author: Sea Inside

What is payback and how to calculate it

We receive many inquiries asking for clarification of professional investment terms. One of the most common questions is what is real estate payback, how to calculate it and how it differs from profitability. Let's explain with an example.

Payback and profitability are two main financial indicators for assessing the liquidity of real estate. Both parameters show the investment attractiveness of the object, but from different angles. In short, payback is the time it takes to pay back the investment (investment). Yield is the profit that can be earned on rent (reciprocal).

Payback period: calculation

You can calculate the average real estate payback yourself, for this it is not necessary to have a real estate payback calculator. Remember the simple formula from Sea Inside: the cost of an apartment or house should be divided by the annual rental income. It is measured in years (since the main element of the formula is time). Yield is calculated differently: the annual rental income is divided by the value of the property. It is measured as a percentage (the main thing in the formula is the ratio of price and profit). Please note that these are averages, as the final figures may be affected by variable factors (taxes, utility bills and other payments).

Example

To make it clearer how all this works in practice, we will calculate on a specific example. Suppose you bought an apartment in Georgia, in Batumi - in a new premium residential complex with sea views on the first coastline. Total area - 36 sq.m. The cost of the white frame is $36,000. Let's add about $10,000 to it for repairs, furniture and appliances. In total, the final price of apartments ready for rent is $46,000.

Taking into account market rental rates, the average income from daily rent in Batumi is $50-80 in the season and $20-30 in the off-season. The season in Batumi lasts from May to October (that is, 6 months out of 12). We take the minimum indicators and insert them into the formula. Net income per year minus expenses (“communal” + maintenance + cleaning + commission of the management company) - $ 8,300.

It turns out that it is possible to recoup investments specifically in these apartments in 6 years. Profitability - 18%. Such indicators prove that buying a house in a popular resort is a profitable investment. This example demonstrates well the relationship between these two terms: the higher the yield, the shorter the payback period according to the calculation. This is another pattern that will help you navigate the calculations.

However, it should be remembered that you should not rely on a single example. It is necessary to calculate the numbers in each specific case separately, since situations are different, and every nuance can play a role. Suppose the apartments themselves are ideal for renting out, but the infrastructure of the quarter is not well developed (no transport available, bad roads). When investing in real estate, consider the details, and then the investment will quickly and profitably pay off.
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