ROI in Real Estate: How to Determine the True Profitability of an Investment
The sheer volume of offers on the real estate market often makes choosing the right property a challenge. Making a decision becomes particularly difficult when an investor has to compare completely different types of objects or locations. In such situations, the central question arises: how is it possible to determine in advance which purchase will yield a profit and which will turn out to be a loss?
To answer this question and replace vague assumptions with concrete calculations, we use ROI (Return on Investment). This is an indicator of investment return that reflects capital efficiency in precise numbers. Simply put, ROI determines exactly how much profit is generated for every Lari invested.
What is ROI and Why is it Important?
ROI is a financial indicator that measures how much profit a specific object (flat, apartment, commercial space) generates after deducting all expenses and the initial capital invested. However, in the case of real estate, this process differs from other assets. Unlike stocks, where the focus is primarily on price fluctuation, real estate requires observing income generation, operational costs, and the potential use of the asset for banking obligations.
This metric helps investors determine three key factors:
Profitability Assessment: Before funds are invested, the pre-calculated ROI must exceed a set minimum threshold.
Comparative Analysis: With the help of ROI, it is mathematically possible to compare vastly different assets, such as a residential apartment in Vake versus a commercial space in Gldani.
Performance Monitoring: After purchasing the property, this coefficient shows the owner how much improved management is reflected in actual financial results.
When analyzing, one must also consider that real estate returns are not defined by a single specific number, as income is typically accumulated from several sources:
Cash Flow: Monthly income received from rent minus expenses;
Equity Accumulation: Paying down the principal amount of a mortgage loan.
Appreciation: The increase in the property's market value.
It is important to remember that each of these components requires different times and conditions to be realized.
What Counts as a "Good" ROI?
The question often arises: what figure can be considered a top-tier result? In reality, a "good" ROI is a relative concept and depends entirely on the asset type, accompanying risks, and existing market conditions. To create a general picture, we can look at statistics from the United States, where the average annual return on residential real estate is approximately 10.6%, commercial spaces sit at 9.5%, and Real Estate Investment Trusts (REITs) reach 11.3%.
Private investors who use loans to acquire assets often target an annual cash-on-cash return of 8% to 12%. As for the Internal Rate of Return (IRR), expectations hover between 15% and 20%. However, dry numbers mean little without context, as a high ROI often implies high risk; therefore, every case requires individual assessment.
How is ROI Calculated in Real Estate?
There are two main methods for calculating returns in real estate. The choice depends on how the purchase is financed - by paying the full amount or by using a bank loan.
Method 1: Paying the Full Amount (Cash Purchase)
The so-called "Cost Method" is used when the property is purchased entirely with personal funds, and the natural profitability of the asset needs to be assessed without bank involvement. The calculation principle is as follows: the cost of investment is subtracted from the total profit gained from the investment, and the resulting number is then divided by the cost of investment.
Example: If an investor decides to buy an apartment under construction for 150,000 GEL and spends 50,000 GEL on renovations, the total investment amounts to 200,000 GEL. If the property is sold a year later for 300,000 GEL, the profit is 100,000 GEL. According to the formula, 100,000 is divided by 200,000, yielding a 50% return.
Method 2: Using a Bank Loan (Financed Purchase)
If the investor purchased the apartment through an installment plan or bank credit, they must use the second method for calculating ROI, which yields a completely different result.
In this case, the investor takes a loan to cover 80% of the apartment's value, which amounts to 120,000 GEL. This means the money paid from their personal pocket - the down payment - is only 30,000 GEL. To this, we add the 50,000 GEL for renovations, which the investor pays themselves. Ultimately, the actual personal cash invested is 80,000 GEL.
If the property is sold for 300,000 GEL, the bank debt of 120,000 GEL is paid off first, leaving the investor with 180,000 GEL. Since they originally paid 80,000 GEL, their net profit is 100,000 GEL.
In this scenario, to calculate the return, the 100,000 GEL profit must be divided not by the full value of the apartment, but by the actually invested 80,000 GEL, which equates to a 125% return. This clearly demonstrates how the intelligent use of leverage increases the percentage of profit. Thus, unlike the previous case, we achieve a result where the profit exceeds the initial cash investment.
Factors Influencing ROI
In real life, many external factors impact ROI. Foremost among them are location and infrastructure. The value and potential of real estate are determined first and foremost by its location. However, location should not be assessed by general impressions alone; the following economic components must be analyzed in detail:
Proximity to employment hubs;
Transport infrastructure;
Schools, parks, and retail outlets.
These factors influence the potential of the investment property, the demand for it, and the stability of rental income.
Beyond location, selecting the right property type is crucial, as different real estate assets are characterized by different risks and benefits. In the Georgian reality, investors mainly choose two paths:
Under Construction vs. Completed: Investing in an apartment under construction is interesting from a capital growth perspective. The price is low at the initial stage, and the value increases upon completion. However, construction timelines and the inability to collect rent during this period must be considered. On the other hand, a renovated apartment is more expensive and appreciates relatively slowly, but it can generate income immediately upon purchase.
Premium vs. Standard Segment: Premium-class complexes, which feature security, a concierge, and well-maintained spaces, are the most profitable for real estate investment. Such apartments are generally targeted at high-solvency tenants. Standard apartments are easier to rent out, but tenant turnover is frequent, requiring more effort in maintenance and management.
It often happens that the ROI calculated on paper does not materialize in reality because investors assume constant, uninterrupted occupancy. In truth, tenant turnover is accompanied by periods where the apartment sits empty, generating no passive income.
Furthermore, there are property management and technical costs. While managing the rental independently saves on management fees, it consumes significant time and energy. A reserve fund is essential for unforeseen events, such as appliance failure or cosmetic damage.
Common Mistakes When Calculating ROI
Incorrect expense calculation is the primary cause of investor errors. Due to a scarcity of data, simplified rules are often used, creating an inaccurate picture. One common method is the "50% Rule," which assumes that half of the income goes to expenses and half to profit. In reality, the share of expenses varies from 30% to 60% depending on the market, and such a cookie-cutter approach may prove false.
Another serious mistake is confusing current expenses with capital expenditures. Investors often do not know how to distinguish minor repairs (e.g., changing a faucet) from major capital spending. The correct approach is to pre-determine an annual reserve fund calculated per square meter.
In summary, ROI in real estate is a complex indicator that clearly reflects how effectively capital is spent and circulated. To see the complete picture, a combined analysis of cash yield, price appreciation, and equity accumulation - along with the smart use of leverage - is essential.
Invest in High-Yield Real Estate with "Materia" Projects
As discussed above, the ROI coefficient is directly linked to risk management, location, and project quality. While it is impossible to pre-fix an exact percentage rate in the real estate market, there are fundamental factors that drive high returns. The development company "Materia" creates precisely those premium-class assets that guarantee investors stable income and capital value growth.
"Materia's" portfolio is distinguished by strategic locations, the highest quality of construction, and multifunctional infrastructure, which lends high liquidity to the real estate. Let's examine two of the company's standout projects that carry the best investment potential:
1. Materia Outlook Forest in Krtsanisi
If your goal is investment for high rental income, Outlook Forest is the ideal choice. The project is located in the diplomatic district of Krtsanisi, near the embassies of France, the UK, and other nations. This location automatically ensures demand from high-solvency tenants (diplomats, expats).
Why will this project yield a high ROI?
Unique Infrastructure: The 28-story complex includes indoor and outdoor pools, a fitness center, a spa, a business lounge, and a rooftop restaurant. Such services increase the rental value of the property.
Recreational Value: The complex has its own walking path that connects directly to the Botanical Garden and a 1km hiking trail in the forest.
Premium Quality: Aluminum doors and windows and energy-efficient materials reduce future operating costs, thereby increasing net profit.
2. Tabakhmela Estates: Investing in Land with Added Value
The Materia Estates direction offers a completely different and innovative investment model. Located on 8 hectares in Tabakhmela, the project brings together land plots with fully established infrastructure.
Investment Advantages:
Capital Growth: Land as an asset appreciates over time, while land that comes with ready-made utilities and roads increases in price even faster.
Ready Ecosystem: The territory already accounts for padel and basketball courts, cycling tracks, squares, and a secured perimeter.
Flexibility: The owner can build a house according to an individual project (with an agreed facade) or use projects offered by the company, which reduces organizational risks and construction time.
Investing in "Materia" projects means not just purchasing square meters, but depositing capital in an environment where infrastructure, safety, and a prestigious location work in your favor. These are assets that retain and grow their value over the years.
If you are ready to consider a premium residence that fully meets your requirements for comfort, security, and high returns, contact us:
๐ 84 Vasil Barnovi Street, Tbilisi
๐ +995 0322 11 11 10
