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What is capital gain and how to calculate it

Investing

October 28, 2019

One of the advantages of real estate investment is that assets -such as houses, lots or apartments- increase in value over time.

However, property value does not depend entirely on the property per se, but on external elements. This positive increase is known as capital gain and is one of the main elements you should look for before making any real estate investment.

What is capital gain?

One of the reasons why real estate investment is considered one of the 5 safest investments you can make in your life is because properties are a tangible asset that increase in value over time.

That is to say that you can re-sell a property in the future and its price will be higher than what you paid. However, that is something that apply with all the goods. For example, car’s value decreases to 81% of the initial value after a year. On the contrary, a property increases in value thanks to factors independent of it.

That is why the real estate market continues to be one of the main types of investment for those who want to guarantee their money and future.

With the volatile stock market and the distrust generated by investments in the technology sector -apps and virtual currencies-, real estate investment creates confidence among investors: a tangible asset is more protected from inflation than savings account and it generates more profits. Real estate investment allows investors to collect constant income, either by renting their property or reselling it at a higher price in the future.

Another advantage of real estate investment is that you do not need to invest in a house or apartment. As mentioned in ‘What is an investment land and why should i invest in it?’, investing in industrial lots and residential lots is also a good option: you can acquire properties -lots- at very low prices but value will increase thanks to future development of the area.

What is capital gain and how to calculate it


Capital gain and location are things you need to analyze before buying a property

As mentioned in  ‘What is the investment that generates greater capital gain?’, in order to make a good real estate investment, rather than being influenced by tendencies it is very important to analyze the following elements to ensure that capital gain of your property will increase in the future:

  • Property location
  • Mobility and accessibility
  • Security
  • Projection of growth
  • Amenities
  • Quality and property maintenance.

These elements help to improve the quality of life of inhabitants and therefore, making your property more attractive for rent or re-sell.

How can I calculate capital gain?

Capital gain is determined by property location, mobility, accessibility, security and growth plans -which will help you know if the area where you plan to acquire your property will be near schools or shopping malls.

In the same way, amenities can also influence capital gain, since they have become part of the norm in the real estate market, so you cannot ignore them when making an investment.

Next, we will briefly explain the elements that influence capital gain.

Property location

Location is the key factor when investing in real estate. The part of the city where a residence is  located is important but you also need to consider specific location.

A corner property, or a residence in a main avenue will have more value over time. Buying a pre-sale property is the best opportunity to acquire a residence at a low price and also choose its location.

In the real estate market, property location is very important to ensure the increase in capital gain and property value.

Many times, first-time investors get carried away by the idea that acquiring a property -without considering the location- is already an investment, and they seek to buy affordable real estate. However, while buying a property gives you the opportunity to make your money become a tangible asset that can protect you from inflation, the truth is that buying a property in an unfavorable location can affect property value.

In the long run, if the area where you buy a property is considered insecure or with hard access, you will not be able to fully benefit from your property, since the average income will probably be lower than what you thought.

What is capital gain and how to calculate it
Capital gain of your property increases over time and it is influenced by location.

Mobility and accessibility

Mobility and accessibility are factors very related to property location. When we talk about mobility and accessibility we refer to how easy is access main streets and services, hospitals, schools, entertainment centers and shopping malls.

And of course, this can vary from one city to another. It is not the same to acquire a residential lot in Merida than a condo in Playa del Carmen. In addition to the fact that both cities do not have the same places, those properties are totally different. In Merida, you would be looking for a lot in an area with ​​high capital gain and near the most exclusive shopping malls.

On the other hand, in Playa del Carmen the most important attraction is the 5th Avenue. So if you are looking to acquire an apartment in an area where you can enjoy local culture and exclusive shops near the beach, the 5th Avenue is the right choice.

That is why it is very important that before investing you analyze where do you want to invest and the possibilities of access and mobility offered to inhabitants.

What is capital gain and how to calculate it

Security

As mentioned at the beginning, the security of an area is a very important factor that you cannot underestimate when making your real estate investment.

Security can influence capital gain. One of the reasons why Merida and Yucatan Peninsula are attracting more people is because Merida is considered the second safest city in Latin America.

The same goes for areas with high capital gain: they are safer.

The projection of growth

One of the 7 tips of the 7 richest people in the world in real estate that you can learn is the possibility of seeing beyond the present. As you know, real estate investment is a long-term issue. The objective of becoming expert real estate investors is to be able to anticipate the future and development of an area to be able to buy properties at low prices and that these increase their value even more over time.

This may sound confusing to some, since in previous sections we have mentioned the importance of not being guided by the price of real estate and doing so by location. However, with urban growth, it is normal to find real estate developments that are in areas with growth and development plans. That is, at this time there may seem to be nothing around them.

The projection of growth allows us to anticipate our investment, since if we know what the urbanization plans are, which companies have investment plans and what are the shops or services that they plan to establish near, we can acquire our properties before the surplus value increases -and with that, the price of our property-.

What is capital gain and how to calculate it
Merida, Yucatan is one of the cities that has grown the most in the last 15 years. Thanks to its safety, culture and its privileged location, Merida is the city with the highest quality of life in Mexico.

What other factors can increase property value?

Although capital gain does not depend entirely on the property, there are two factors that significantly affect the value of your property over time: amenities and quality of your property.

Amenities

In recent years, amenities have become essential in real estate developments. Pools, gyms, soccer, paddle or basketball courts and private security, are some of the amenities that have become popular.

The amenities of a real estate development should be designed to improve quality of life. In the end, whether you rent out your property or decide to live in it, the amenities are a plus that more and more people are looking for carefully, especially those who want to have a full life: go jogging in green areas, spend time with the family in a park, go to the gym as close as possible to your home, etc.

In the long term, if you are thinking of renting out your property, amenities will be more attractive for potential tenants. Amenities also help increase capital gain of a real estate development because they improve quality of life of residents.

Quality and maintenance of the property

One benefit of acquiring a new property is that maintenance is minimal. Yes, it is quite normal for developers or real estate agents to have a maintenance fee. This fee usually serves for management and care of the amenities.

When you buy an old house or apartment directly from the owner, it will need some repairs and improvements: electrical outlets, plumbing, air installations, etc. It will depend on the care given to the property. That is why many people prefer to acquire new houses to be sure that the property complies with the corresponding regulations and facilities.

Looking at the materials or amenities of a property can help you to make a better decision.

How to ensure capital of your property?

At this point, you know how to ensure capital gain of your property. There is no doubt that location is the most important factor. Remember: look for properties in areas with access to avenues and exclusive areas, preferably located in corner. Do not forget there is the possibility of acquiring a pre-sale property to ensure the increase of capital gain: a new home will have low maintenance expenses and said property will increase in value over time.

This is another important point to consider: real estate investment is better in the long run and a privileged location will guarantee property value. Many times we allow ourselves to be guided by emotions, however before making a real estate investment you need to treat is that in order to see the results of your efforts and patience.

If you want to learn more about real estate investment in Mexico, don’t miss our Guide to real estate investment in the Yucatan Peninsula, one of the most important destinations for urban growth, tourism and the real estate market in Mexico.

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