Rents are rising, so why are investors losing money?
At the last conference we held in the north, the question was: How do you calculate the return on the property? Is it based on the purchase price or the value of the property today?
Many investors tend to calculate the return on the property according to the purchase price, so they know how much they have invested and how much money they are getting on a regular basis. For the IRR calculation, do not worry, here is an explanatory video on the subject of
Tal Levi :
https://youtu.be/NWa1QC5sZrI).
So we know that the calculation of profit according to the cost of the property on the day of purchase is important to the question "Did I make a good deal?", But to the question of whether I make a good deal today when I continue to own the property - here I can make a profit today from the existing capital - that is, if I sell the property - what an exchange profit I can get in the market from the money I have left in my pocket after the sale.
Assuming I want to maximize my profit from my existing capital, I want to make sure once in a while that he works the hardest possible. Earnings from previous years are great, but they do not indicate that today my money is still doing the best it can. Profit on value increase made in the previous year - it's already yours and it's part of your existing capital.
For example: If you have an asset that goes up every year at 5% and you hold it for about 10 years, a very nice profit has accrued, but for example we have built a power plant in front of the property and in the tenth year it stops rising. And here we ask the question: In this case, should you hold the property because its value has risen in the past or should you sell it because the monetary value of the property can be purchased more successful property that will continue to rise?
If the calculation is made according to the initial purchase cost, even a few years in which there is no change in the value of the property will not make the transaction "bad". Because the initial profit was good and it will cover several years without profit. According to the value in the market today - we will immediately understand that the property must be sold and in the years when the first property is "stuck" we can continue to make a profit in another channel.
The same is true of a rented property: when asked "How much return does the property make from the rent?" The right thing to do is to calculate according to the current market value - why let past profits "cover" the current period ?!
So if the rent increases - but the value of the rent increases more - their ratio changes to your detriment! The annual return on the property declines every year as the trend continues, on the other hand there is still profit from the increase in value, we will never underestimate it.
But it is important every year (at least) to check whether your capital utilizes all its potential - and this can only be done according to the current market value of the property.
(The article about the country, but it doesn't really matter)
https://www.globes.co.il/news/article.aspx?did=1001307699
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