How much does a property investment actually earn?
A property can rise in value while bringing in little cash each month. Another may provide steady rent with only a modest change in price. Return on investment, usually shortened to ROI, helps put the result in proportion to the money you invested. To use it well, first decide which result you want to understand: profit on a sale, annual rental income or the cash left after loan payments.
These figures answer different questions. Keeping them separate makes it easier to compare properties and see whether an estimate fits your budget.
Start with the profit and the money invested
The basic calculation expresses a gain or loss as a percentage of the investment cost:
ROI (%) = (Net profit / Total investment cost) × 100
Take a purchase without a loan. If the total cost allocated to the investment is USD 150,000 and the net sale proceeds are USD 180,000, the profit is USD 30,000. Dividing that by USD 150,000 gives an ROI of 20% over the ownership period. If you owned the property for several years, this is still the return for that whole period; an annual return requires a separate calculation.
For a complete result, include any rental income and the relevant purchase, improvement, holding and sale costs. Set out what has been included and count each expense once. Additional costs left out of the example would reduce the return.
What does the rent earn in a year?
Annual rental yield focuses on the income from letting rather than a future sale. For a net yield, deduct the stated operating expenses from rental income and divide the amount left by the defined acquisition cost.
For example, USD 10,000 of annual operating income on a total acquisition cost of USD 150,000 gives about 6.67%, before financing and the owner’s income tax. The property’s change in value is outside this calculation.
A more detailed example starts with USD 150,000 spent on the purchase and improvements, USD 18,000 in annual rent and USD 5,000 in annual operating expenses. That leaves USD 13,000, giving a net rental yield of about 8.67% before the owner’s income tax, with no loan.
The usefulness of either figure depends on the expenses behind it. Allow for vacancy, repairs, management, insurance and future replacements in your budget. Tax also needs its place; our guide to property taxes in Turkey explains another part of the cost picture.
With a loan, look at your own cash too
Borrowing changes the amount you put in and the payments you make. Cash-on-cash return looks at the annual cash flow left after operating expenses and loan payments, including interest and principal, before income tax, relative to your own cash invested:
Cash-on-cash return (%) = (Annual pre-tax cash flow after debt service / Cash invested) × 100
If that annual cash flow is USD 12,000 and you invested USD 180,000 of your own money, the return is about 6.67%. Unrealised appreciation is not included.
Now consider a USD 500,000 purchase funded by USD 180,000 of your cash and a USD 320,000 loan. If the property value reaches USD 600,000 with the loan balance unchanged, your equity is USD 280,000. The USD 100,000 increase is about 55.56% of the initial cash contribution, before interest, transaction costs, taxes and rental cash flow. It remains an unrealised gain until a sale; it is neither annual cash income nor a net sale profit. Dividing equity by the property value gives an equity ratio, which measures something different from ROI.
Three other terms that help explain the figures
- Net operating income (NOI): property income after vacancy and operating expenses, before debt service and the owner’s income tax. Capital expenditure and depreciation are treated separately.
- Capitalisation rate: annual NOI divided by the purchase price or current property value. State which value is used. This leaves out financing and does not show the whole investment return.
- Internal rate of return (IRR): a calculation that also accounts for when payments and receipts occur. It finds the discount rate at which their net present value is zero, using the cash flows and sale proceeds entered.
Build the calculation around the home you are buying
Location, condition and purchase price work together. A well-kept home may need less immediate work, with that advantage reflected in the price. A cheaper property can be worthwhile if the repairs are properly budgeted. For either, use evidence from comparable sales and lettings, distinguishing asking prices and promised rents from completed transactions and collected income.
A monthly cash-flow plan shows when money is needed, which a single percentage cannot. Try lower rent, vacant months, higher costs and a slower sale alongside the expected outcome. Choose a location that suits the likely resident or guest. For developing areas, allow for infrastructure delays; for a longer hold, include ongoing expenses as well as the benefit of spreading transaction costs over more years. Different properties can still share tourism, currency and financing risks.
Keep comparisons in the same currency and period, with consistent treatment of debt, tax and costs. Inflation affects purchasing power too. There is no universal double-digit target, and ROI alone does not tell you how likely a loss is. An agent can help with local market evidence, while legal, tax and technical advisers can assess the matters within their expertise. These details give you a calculation you can later compare with actual income and costs.
Let’s put the property figures in context
Comparing property in Turkey? Tell us your budget and how you plan to use the home. We can help identify suitable options and gather the property information for discussion with your legal and financial advisers.
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