What is profitability and how to get it with your property?


July 28, 2020

You can make a lot of profit from your property, but how do you do it?

Although real estate is the safest investment you can make, it is well known that its profitability can be higher as long as you take into account different factors such as the growth of the city, the services and amenities that your property offers.

Whether this is your first investment or you are an experienced investor, it is always good to take into account -or remember- some of these things because they will help you get better results.

So, in this article we will tell you what profitability is and give you some tips to achieve it with your real estate investments.

What is profitability?

Before getting into the topic of how to maximize the profitability of your real estate investments it is necessary to review some basic concepts.

So, what do we mean by profitability? Let's say that profitability is the benefit obtained from an investment.

For example, if a product costs 10 pesos and you sell it for 16 pesos then the profit margin is 6 pesos.

Calculator and pen.
Generally, profitability is calculated as a percentage, and it serves to measure the profits acquired with the amount of effort employed.

In the case of property profitability, you should consider if it is a property for sale or rent, as well as things like maintenance costs, service payments, among others.

What are the types of profitability?

There are several ways to classify profitability and many of these terms are used in business, but the most important ones are:

  • Economic profitability: Also known as Return on Investment (ROI), it is the one that takes into account only the gross income without considering how the investment has been obtained, that is, financing and debts in general.
  • The financial profitability: Also known as Return on Equity (ROE), it is the one that takes into account the taxes, interests and the diverse financial expenses. In short, it measures the capacity to generate profits from one's own funds.

This means that the financial return can vary depending on the financing.

Profitability of your real estate investments

You are probably wondering how you can make a profit from your property.

It is well known that real estate is one of the safest investments around, and this is due to its ability to maintain or increase its value over the years.

If you want to invest in real estate for these are some of the things you want to take into account to obtain profitability:

1. Invest in areas with high capital gain

One of the main tips we always share in our posts, as it is one of the factors you should consider before buying your property, even before you see the design of the property.

Capital gain is the increase in value of a property due to different circumstances, both internal and external. Capital gains will help you to obtain a high margin of profitability.

Due to capital gain, two houses with similar characteristics will have different prices when they are sold.

In order to choose the area with the greatest capital gain, it is important that you ask yourself the following questions:

Is there a tourist flow in the area? Are there enough services and entertainment places? What kind of houses are in the area? Is the city expanding towards the area I'm interested in? Have property prices increased in recent years?

If you can answer most of these questions, you're on the right track for investment.

2. Pre-sale purchase for low prices

It is true that when you buy a move-in ready property you will get a return over the years, however, buying a pre-sale property is the way to get the most return.

To begin with, buying a pre-sale property - usually residences or apartments - means acquiring a property that will be yours before it is built.

Pre-sale developments are built with the idea of taking advantage of the growth of an area near shopping malls, hospitals, schools and other types of services.

In the north of Merida you can see examples of this: residential and apartments that are near shopping malls like La Isla Merida and The Harbor, and universities like Anahuac Mayab.

The proximity to key places is what contributes to an area having high capital gains, and in addition, when you acquire a pre-sale property, its cost is much lower and therefore the profitability is higher.

3. Rent the property for immediate income

Once your property is ready, you probably wonder how long it will take you to start making a profit.

To enjoy the advantages of investing in real estate you must be patient, because it is a long term investment.

However, there is a way in which you can begin to obtain profitability from your real estate investments almost immediately: renting your property.

Renting a house or apartment ensures you a passive income, which absorbs the initial cost of your investment.

Keys next to a plastic house.
In addition, this allows you to have the house inhabited while you decide to move or while you wait to sell it at a better price.

In fact, this is a very popular option among people who have vacation homes and do not want them to be uninhabited for very long periods of time.

And it doesn't really have to be a house, as any type of property can be rented, such as offices, land, premises and warehouses.

4.Sell when the property value has increased

Renting your property is the best if you want a higher return in the short term, but if what you want is a larger income in a single moment, then your best option is to sell.

You have to know the right time to sell a property, because if you do it in a hurry, your profits will be lower.

That's why you should be informed about the current situation of the country, the demand of properties in the area where it is located, the growth of the city, the services around it, the economic crises and the inflation.

It is always a good idea to have your property in good condition; just remember to pay special attention to its maintenance when you are going to sell it, so that at the time of valuation you get a higher figure.

How do you calculate the profitability of your property?

Calculating the profitability obtained from your real estate investment is not very complicated, since you only need certain values depending on whether it is a property for rent or one for sale.

In the case that it is a property for sale, you have to make your calculations taking into account the following:

  • The initial value: how much you invested in the property.
  • The current value: how much you are selling it for.

To the value of the sale you have to subtract the initial investment, then divide it by the same initial investment, multiply it by 100, and the result should be the profitability in percentage.

Banner of real estate developments in the Riviera Maya.

And in the case that it is a rental property, then you have to take into account the following:

  • The annual income: the sum of all the payments during that time.
  • The maintenance cost: whether it is remodeling or different services.
  • The initial value: how much you invested in the property.

When it comes to rent, you have to subtract the maintenance costs from the annual income, then divide it by the initial investment, multiply it by 100, and the result would be the profitability of the property within a year.

Maintenance costs can vary, as there are some people who rent the property with very few services, while there are others who even include internet service.

Where to get more profitability?

So, which cities make it easier for you to get the most out of your properties?

It is well known that - at present - Merida and the Riviera Maya are the best areas in Mexico for both vacationing and investing in real estate.

There are many reasons for this, but we will summarize them below, so that you can guide yourself more easily in your next investment.

Merida, Yucatan

Merida is a city that stands out for a lot of things, such as being the second safest city in America, according to the CEO World magazine ranking.

In addition, it is also well known for being a place with a lot of history, a great hospitality from the locals, its delicious gastronomy, culture, great promotion of art, and many other things.

All this has influenced the growth of the city in recent years, making more and more companies decide to invest in the city, improving the quality of services and amenities.

Security combined with services and entertainment have convinced many Mexicans and foreigners that living in Merida is the best decision they can make.

The capital gain of the northern area is so high that it allows you to obtain a very good return on your properties, whether you keep them for rent or wait several years to sell them.

Banner of real estate developments in Merida.

The Riviera Maya

The Riviera Maya is one of the most important tourist destinations in Mexico, and in recent years has become home to many retirees or people who want to live near the beach and nature.

The beauty of this place is enough reason to want to have a home here, however, if you consider the profitability it also turns out to be a great option.

So why invest in the Riviera Maya? It all comes down to the high capital gain thanks to the flow of tourists, its infrastructure and because the location itself is privileged.

This allows you to acquire a pre-sale apartment and rent it out to obtain a much higher profitability than in other places.

The following are the cities in the Riviera Maya that give you the most benefits -in several aspects-, and in which we recommend you to invest:

  • Tulum: In Destino Hunab, you will be very close to the archaeological site, the beach, several cenotes, the Sian Ka'an Reserve, among many other tourist places. It all comes down to the high capital gain thanks to the flow of tourists, its infrastructure and because the location itself is privileged.
  • Playa del Carmen: It is the right place if you want luxury, beach and partying because it has so many entertainment options that it is almost impossible to get bored being here.

Real estate: the best investment

When talking about investment it is almost impossible not to recommend real estate, as this is a very safe way to protect - and increase - your money.

As mentioned above, real estate does not lose its value once you buy it. On the contrary, after a few years the value of the properties increases.

This is why many experienced investors tend to buy several houses or apartments, and rent or sell them to get the maximum possible profit.

In this way it is easy to conclude that the best way to get a return on your investment is to buy property, and even better if it is the right property.

If you want to continue learning about this topic, we strongly recommend you read our guide on where to invest your money.

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