Investment return: How to understand it, calculate it and increase it

Do you know what an investment's return is and why it should matter to you? This key indicator is what decides whether your investment is successful. And that is, after all, what we are after. In today's article we will explain what a return is, how it is calculated and how you can maximise it – including with the help of InvestBay.

What is a return and why is it important?

The return on an investment is an indicator that expresses the profit or benefit that an investment brings over a certain period. If you want to invest effectively, then understanding what a return is (and how it relates to liquidity or risk within the investment triangle) is essential.

An important foreword

First it is necessary to understand what you are actually investing in. The return then depends on that.

When you invest directly in a property, the return is the rent and, at the same time, the appreciation over time (the capital gain). However, if you invest in, say, a bond for developers, the return is a fixed interest rate – and yet both could carry the name of investing in real estate.

From this it also indirectly follows why the property you live in is not an investment. The value of the property does grow in capital terms; however, this return is only realised upon sale. But if you are not planning to sell it, the appreciation simply will not land in your account.

How is an investment's return calculated?

For a correct calculation of an investment's return, it is key to know several factors:

• The initial investment cost.
• The net income from the investment.
• The length of the investment horizon.

The formula for an investment's profitability is simple:

Investment profitability (%) = (net profit / initial investment) x 100

Example: You bought a property for CZK 10,000,000 and earn a net profit of CZK 100,000 from it per year. You use the investment profitability calculation:

Investment profitability (%) = (100,000 / 10,000,000) x 100

This calculation shows you that your annual return is 1 %.

If you are weighing up various investments, this formula is also ideal for comparison.

InvestBay tip: For faster calculations, use our investment calculator.

Types of returns

There are several types of returns, which depend on the type of asset you invest in. Let's take a look at a few of them.

Rental yield (for real estate investments)

The rental yield represents the regular monthly income that comes from the actual rental of a property. This type of return is typical of investments in residential apartments, commercial spaces or holiday properties.

The main advantages:

• Stable and regular income.
• The possibility of taking advantage of tax benefits (e.g. deducting maintenance costs).

What affects the rental yield?

• The property's location: High demand for housing or rentals increases the rent.
• Occupancy: An empty property brings no income, which negatively affects the overall return.
• Maintenance and management costs: Lower costs can significantly increase the net return.

For example, with InvestBay you invest in real estate without having to deal with renting or maintenance. From the rent you receive a share that is paid out regularly, for example monthly or quarterly.

Capital gain (increase in the asset's value)

A capital gain arises when the value of an asset grows and the investor sells it for a higher price than they bought it for. This type of return is typical of long-term investments, such as real estate (which you plan to sell, see the example above), stocks or other securities.

For example: You buy an apartment for CZK 2,000,000 and sell it after five years for CZK 2,500,000. Your capital gain is CZK 500,000.

What affects the capital gain?

• Market conditions: Economic growth and stability support the growth of asset values.
• The quality of the asset: A well-maintained or strategically located asset has a higher chance of appreciating.
• The holding period of the asset: The longer you hold an asset, the greater the potential for its value to grow.

InvestBay works with properties that have high appreciation potential. After the investment horizon has elapsed, the property is sold and the profit is divided among the investors.

Reading tip: How do we select properties here at InvestBay? Read the interview with Andrew Thompson or our brief page on how it works.

Dividends and interest (for investments in stocks and bonds)

Dividends and interest represent returns that companies or bond issuers pay you for providing them with your capital.

• Dividends: Regular payments paid to shareholders out of a company's profit. This is usually a long-term source of income.
• Interest: A fixed return that you receive from bonds or other forms of loans provided to companies or governments.

Advantages:

• Both dividends and interest can be a stable source of income.

How does the return work at InvestBay?

InvestBay combines two main types of returns: the rental yield and the capital gain. How does it work?

• Rental yield: Once the project is financed, you receive regular payments from the property's rent, divided according to the size of your share.
• Capital gain: After the investment horizon, which usually lasts 5 to 10 years, the property is sold and the profit divided among the investors.

Thanks to this, you have the opportunity to benefit from short-term income from rent and the long-term appreciation of the property's value. What is more, InvestBay handles the management and sale of the properties for you, which minimises the worries and maximises the profits.

An example of a return:
If you invest CZK 100,000 in a property worth CZK 10 million, you receive 1 % of the rent as well as of the sale price. If the property's price rises by 50 %, your profit from the sale is CZK 50,000 and the total return is increased by the rental income.

For more information about the individual returns, read the more detailed article with charts, How InvestBay pays out money.

Return vs. cash flow

Return and cash flow are two distinct but closely interconnected financial terms that are of fundamental importance when evaluating investments.

• The return on an investment is an indicator that expresses the total profit generated by an investment over a certain period. The return includes not only the income (for example from rent or dividends), but also the capital gain (the increase in the investment's value). However, you do not see the whole return or the capital growth in your account immediately, only upon sale.
  It is typically measured as a percentage of the initial investment and provides a picture of the investment's efficiency from a long-term perspective.
• Cash flow, by contrast, is the actual movement of money associated with an investment – in other words, what you as an investor receive in your account. Cash flow tracks how much money comes directly into your account (e.g. from rent, interest, dividends).

This can therefore mean, for example, that even if your real estate investment has an overall profitability of 8 %, it does not mean that, with a hundred-thousand-crown investment, CZK 8,000 will land in your account each year.

For successful investing, it is key to understand both terms and use them in your decision-making, so that the investment is both profitable and sustainable.

The most profitable investments: How to find them?

Finding the most profitable investment is the dream of every investor. A high return, however, often comes with higher risk too. To be able to make the right decisions, you should of course first know what you are investing in (see our Important foreword at the start of the article). Next, take into account:

1. The investment's profitability.
2. The length of the investment horizon.
3. The riskiness of the given investment.

Real estate investments are among the popular options, because they combine stability with growth potential. Real estate can bring you a regular rental yield as well as a capital gain upon sale.

How to maximise an investment's return?

Do you want to increase your investment's return? Here are a few tips:

• Diversify your portfolio: Do not bet everything on one card. Invest in various assets.
• Use the investment return calculation: Continuously monitor the performance of your investments and compare them.
• Educate yourself: Investment decisions based on knowledge have a greater chance of success. Read our blog!
• Use tools such as the investment calculator from InvestBay: This tool quickly calculates the expected return for you.

The benefits of InvestBay for optimising your return

InvestBay brings innovative solutions in the field of micro-investing in real estate:

1. A transparent process: All offers of investment properties are described in detail.
2. Minimal worries: InvestBay takes care of everything, from managing the properties to dividing up the returns.
3. Returns from CZK 2,500: You can invest with minimal costs and gradually increase your shares.

Start with InvestBay and gain more

An investment's return is a key measure of success, whether you are a beginner or an experienced investor. Let the experts at InvestBay help you, as they show you the way to higher returns without the worries.

Register with InvestBay and start earning today!