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Case Study - 10 Year Investment Return

Download our case study calculations [ Microsoft Excel .xls file 172KB ]

This case study reviews the estimated return on investment that could have been derived from an average South African buy to let property over a 10 year investment period from January 2000 to January 2010. Our intention is to highlight the remarkable investment return that could have been achieved from buy to let property investments over the past decade and to illustrate the calculation methodology that should be used in order to measure and analyze property investment return.

For the purpose of reviewing the results of the case study, we have included the Microsoft Excel based template that we used for our case study calculations. You will not be able to enter your own values and compile your own calculations with the version of the template that we have provided but the full version of the template is included in our template subscription.

We'll start by providing background information on this unique residential property investment calculation template - most of the input values that are used in our case study are listed on the Input sheet and the annual capital growth estimates are included on the CashFlow sheet. You can read more about residential property calculation variables on the Investment Return Calculation Variables page. We also recommend that you visit the Average Annual Capital Growth, Income Tax and Capital Gains Tax pages for more information on how the average annual capital growth rates and taxation amounts should be calculated.

Investment Return Calculation Methodology

The comprehensive analysis of the annual and cumulative property investment return can be found on the Results sheet. Most of the calculations on this page are based on the annual cash flow totals that are calculated on the CashFlow sheet. All the calculations on the CashFlow sheet are based on the input values that are specified on the Input sheet, the calculations that are included on the monthly amortisation table and the prime interest rates that are included on the PrimeRate sheet. The amortisation table is used to calculate the appropriate monthly bond repayments based on the discount rate that is specified by the user and the monthly prime interest rates. The annual bond repayment totals are included in the cash flow calculation and the annual interest totals form part of the annual income tax calculation. The property market values are determined based on the annual capital growth rates that are specified at the top of the sheet.

The investment return analysis includes calculations of the annual & cumulative cash flow balances, equity balances (after taking the effect of selling costs and capital gains tax into account, annual net profit or loss, cumulative net profit or loss, average annual capital growth, net present value (NPV), internal rate of return (IRR), annual return on equity and gross and net rental yields. We strongly recommend that you visit the Property Investment Return Calculation Methodologies page of our website for guidance on how these values are calculated!

Each of the calculations that form part of the investment return analysis has its own unique purpose but we believe that the net present value (NPV) and internal rate of return (IRR) calculations provide the best indication of the overall investment return that is achieved, while the return on equity calculation provides the best indication of the annual investment return that is achieved. For more information on the calculation of the annual equity balances and the return on equity ratio, we recommend that you visit the Return on Equity Calculation page of our website.

The NPV and IRR calculations are based on all the annual cash flow totals from the start of the investment period up to the end of the particular annual period and therefore provide the best indication of investment return on a cumulative basis. These two calculations are often used in conjunction with each other because the NPV calculation indicates the amount by which the actual investment return exceeds or falls short of a user defined investment return, while the IRR indicates what the actual annual investment return percentage is. In our case study, we've used the inflation rate as a discount rate and the NPV therefore indicates the amount by which our investment return exceeds the average inflation rate.

The IRR indicates what the cumulative annual investment return is at the end of each annual period but it is not very useful if you want to calculate the investment return for any particular annual period. The movement in the IRR does provide an indication of whether the investment return for the particular period is greater than or less than the cumulative investment return up to that point but even the movement does not indicate whether a profit that is less than previous profits have been realised or whether a loss has actually been incurred!

This is where the return on equity calculation is extremely useful - this investment return measurement indicates what the investment return is for any annual period. The return on equity is calculated by dividing the annual net profit (or loss) by the equity balance at the end of the particular period. It is therefore an extremely useful indication of annual investment return but does not provide any indication of the cumulative (overall) investment return. The return on equity ratio therefore needs to be used in conjunction with the IRR in order to analyze both the annual & cumulative investment return.

Case Study Results Summary

The investment return analysis that we compiled by using our unique property investment template clearly indicates what an excellent investment buy to let properties have been over the past decade! The cumulative investment return over this period is a staggering 24.6%. The analysis does however also contain a few worrying indications - the annual investment return for the year that ends in January 2009 is actually negative and the annual investment return for the year that ends in January 2010 is only 1.5%!

This is mainly because the exceptional growth that was experienced in the residential property market from 2001 to 2006 started to decline in 2008 and has not shown any indication of recovering. It is therefore apparent that you could hardly have committed funds to a better investment than residential property for a large part of the last decade but the real question is whether residential property investments will still offer an adequate investment return over the next decade. Based on the annual investment return that was achieved over the latter years, we would have to conclude that it does not seem very likely.

This case study also highlights the importance of measuring residential property investment return both on an annual and cumulative basis and we therefore believe that buying a property calculation solution that does not include this functionality will ultimately be a complete waste of your money! It should also be apparent that a comprehensive and accurate property calculation solution will add immeasurable value to your property investment decisions!

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