How to Calculate a Villa’s ROI?

How to Calculate a Villa’s ROI?

ROI is investors’ favorite acronym, and for those of you who are new to this world, it means “Return on Investment”. In finance, ROI is the ratio between the net income and the investment value – said more simply, it is how much money you make compared to how much you invest. It is a powerful tool because it can be used to compare any investment, from stocks to real estate.

If you are reading this on our blog, chances are you are more interested in investing in real estate than in stocks at the moment. In our industry, the ROI is often used in its annualized version as it makes it easier to compare multiple properties. In the jargon, we talk about cap rate – although the cap rate can be gross or net. In Paris, cap rates are known to be around 3% for residential properties, whereas in Bali ROIs can reach 15% and more – you can read it like Bali is five times more profitable than Paris to invest in properties.

You get it by now, calculating your ROI is critical when it comes to considering any real estate investment. Your agent or your developer will probably have a beautiful model ready for you, but it is more than recommended that you do your own calculations – and if you find a developer offering you more than 25% ROI, please ask him the details of his calculation, we are interested! 

To get you equipped, we will share two ways to calculate your ROI, the short one and the long one.

The Short Way : Calculating your ROI on the Spot

Let’s say you are viewing a property and you quickly want to calculate your ROI. For that you’ll need just two values : the approximate nightly rate, and the villa price. You’re supposed to know the villa price, so there is just the nightly rate to determine. The best way to do it is to check for similar properties around you on AirBnb, Booking, or even Google Maps, and find the average price for a night. The bad way to do it is to take 70$ per bedroom, so 210$ per night for a 3 bedroom for instance – note that this is very approximate as it will greatly vary depending on your location, your view, and the level of luxury and services you are offering.

Once you have figured these numbers, here is the two step process : you first calculate the Net Revenue, and then you divide it by the villa price. As simple as that.

Calculate the Net Revenue: 

Approximate Nightly Rate * 75% (Approx. Occupancy for Villas in Bali)* 365 * 0,5 (Approx. Expenses Ratio).

ROI : 

Yearly Cash Flow / Villa Price

Example for a 3 Bedroom Villa in Ubud:

The villa is for lease for 30 years at 320,000$. After checking on the rates around the location, I found that similar 3 bedroom villas will rent for 250$ a night.

I can already calculate my ROI estimate : (250$ * 75% *365 * 0,5) / 320,000$. 

It results in around 10,7%. It’s not an amazing ROI but still enough for me to continue looking into this property. I will have to use the proper method later.

The Long Way : Getting an Accurate ROI

For this one, the calculator of your phone – as much as we love it – won’t be of much help, as we will use a proper Excel or Google Sheet. We will also need to do some research to calculate the most accurate price per night.

Calculating the Nightly Rate

Go to AirBnb and Booking.com and look for similar properties : close location, same number of bedrooms, and same amenities and services. Considering the very large number of properties in Bali, chances are you will find comparables. Once you find a few, create an excel sheet with the rate in high season – June to September –  and rate in low season – November to March – for a few of them, at least 10. Once done, calculate first the average nightly rate of the property throughout the year, and then the average of these values for all properties. You will get a rather accurate nightly price for your property.

Calculating the Occupancy

This one can be tricky, and usually you’ll consider 80% if you are in the busy area, and 70% if you are a bit outside. But here again, it is much better to get actual data from existing properties. The problem is, a lot of tourists book last minute here in Bali, so it would be inaccurate to take next month’s bookings from an OTA as an average.

Here I will introduce AirDna.co, it’s the real estate investor’s best friend. It gathers all rental data from AirBnb such as occupancy, rates, revenues, and you can even get into detail for each property. There you will find a much more precise estimate of the occupancy you can expect, it’s a bit costly but it’s a very useful tool. Otherwise, just consider 75% as an average.

With Nightly Rate and Occupancy, you will be able to calculate the Annual Gross Revenue of your property.

Calculating Expenses

Expenses are pretty standard across Bali. We usually account for 40% to 50% of the Gross Revenue between Marketing, Taxes, Operational Expenses and Property Management Fees. It seems like a lot, but it’s standard and to cut those expenses would mean compromising on the quality of the services you offer or on marketing, and with the growing competition amongst villas here, we would not recommend doing so.

I want to insist on something here : a lot of developers selling off-plan will often reduce the expenses to display attractive ROIs – I can tell by experience. When you are reviewing their ROI tables, always check the ratio between the Net Revenue and the Gross Revenue ; if it’s more than 65%, they probably have been omitting some expenses and you might have some surprises later on. Better be a bit more careful.

Coming back to our Excel model, the best is to take expenses as 50% of your Annual Gross Revenue. If you would like to have our detailed excel sheet we use at Emas Estate with the details of expenses, feel free to reach out on our WhatsApp below.

Calculating your ROI and Adjusting the Model

Once you are here, you have your Net Revenue by multiplying the Nightly Rate, the Occupancy, 365 and 50% for your expenses. You should then divide by the property price to get your ROI.

The advantage of having a model is that you can play with different occupancies and nightly rates to create optimistic, realistic, and pessimistic scenarios ; it gives you an idea of the best and the worst.

ROI Table Example

The Best Way : Reaching out to Our Property Manager

Even if you took the time to detail your model and looked for dozens of comparables, the best way is to contact a property manager who has experience and villas under management. They know the numbers, they have actual data on the market, and they will give you a detailed estimate of how much you can expect out of your property.

Our partner Property Manager is TKT Villa Management, a team led by two French hospitality experts with more than 35 years total experience in managing hotels in Asia. They value transparency and quality, and will bring the best out of your villa. If you want to know more about them, click here to reach their website.

Projected vs. Actual ROI

This is a critical difference about ROIs you need to understand. Any off-plan villa or apartment will have a projected ROI, as no revenue has been generated yet, so it is purely based on the developer’s estimation, and even if it is realistic there is no guarantee you will get the promised returns.

An existing villa will have an actual ROI based on past revenues, it is real and you know the ROI that you are buying.

So, be careful of projected ROIs, and prefer actual ROIs when possible. When equal, an actual ROI is always much more interesting than a projected one.

What do I do with my ROI ?

Once you have it, the ROI serves as a basis to compare different properties. At the same level of risk – meaning comparable properties in comparable locations in our case, you will naturally prefer a higher ROI properties because it will lead to more revenues. It will also pay back faster, and if you divide 1 by your ROI, you will get how many years it will take for your property to pay itself – for 20% it’s 5 years.

For your reference, properties in the most touristic places of Bali range between 10% and 20% ROI : 

  • Existing properties tend to sell at a 10% to 15% ROI.
  • Off-Plan properties tend to sell for 13%+ ROI.

These figures are true for Leasehold only! For Freehold you’ll have a hard time finding a property with an ROI over 8%. That’s the beauty – and the “risk” – of leasehold. If you have no idea what I am referring to you should check this article: Understanding Freehold vs. Leasehold Properties in Bali: A Buyer’s Guide

Further considerations with ROI

  • Risk : a riskier investment will often offer a higher ROI. Take risk into account.
  • Capital gain : in our model we considered only revenues from rental activity, but capital gain can significantly increase your ROI as well. For example, if you invest now in Nusa Penida, with the development we expect of the island, your villa will probably be worth much more after 10 years.
  • Sustainability : while we looked at annual ROIs here, it is also important to consider how long you think your ROI can last. Hence, the idea of doing a 30 years model – we usually prefer 5 years. In fact, if you think Canggu will get you 200$ with 80% occupancy for your 2 bedroom villa for the 25 years of your lease, come talk to us and we will convince you otherwise. Prefer properties with lasting value.

Here are our best ROI properties :

Conclusion

In wrapping up, calculating the ROI on a villa in Bali is not just beneficial—it’s essential for any investor eyeing this tropical investment haven. Whether you’re a novice or a seasoned investor, our guide equips you with the knowledge to make informed decisions, highlighting the lucrative potential Bali holds over other markets. Yet, prudence is key; while the allure of high projected ROIs is tempting, the reliability of actual ROIs on existing properties cannot be overlooked. We’ve laid out both quick and thorough methods to gauge your investment’s worth, emphasizing the value of professional insight from partners like TKT Villa Management for a deeper understanding. Remember, a well-informed investment decision is your first step towards reaping the rewards of Bali’s real estate market. 

At Emas Estate, we’re here to ensure your investment journey is both profitable and enduring, guiding you to properties that promise substantial and sustainable returns. For further understanding of ROI concepts, readers can refer to Investopedia’s detailed explanation of Return on Investment (ROI) at Investopedia – Return on Investment.

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