INVESTING
ROI EXAMPLE
4. Using Leverage: Geared Internal Rate of Return( IRR)
IRR EXAMPLE
INVESTING
ROI EXAMPLE
Capital Growth = R500,000 Total Rental Income over 5 years = R500,000 Property Purchase Price = R1,000,000
Total ROI =(( 500,000 + 500,000) / 1,000,000) × 100 = 100 %
So, over 5 years, your total return is 100 %- you’ ve doubled your investment.
4. Using Leverage: Geared Internal Rate of Return( IRR)
One of the most powerful features of property investing is leverage. By using the bank’ s money( via a mortgage or bond), you can control a large asset with a relatively small upfront investment. This significantly boosts your return on the amount you personally invest.
IRR EXAMPLE
Property Value = R1,000,000 Your Capital Investment = R200,000( 20 % deposit) Over 5 years, Capital Growth = R500,000 Total Rental Income = R500,000
That’ s a return of R1,000,000 on R200,000 invested: Return =( 1,000,000 / 200,000) × 100 = 500 %
Now, to understand the true annual return, especially when there are multiple cash flows over time, you use the Internal Rate of Return( IRR). This calculation factors in:
Your upfront capital
• Your bond repayments
• Rental income each year
• Final sale price or market value
IRR is best calculated using Excel or a financial calculator using the IRR function.
Sophisticated investors often aim for geared IRRs of 15- 25 % annually on well-structured deals.
32 REI MAGAZINE APRIL 2025