Irrespective of how small or large your investment is or whether it is short-term or long-term, the main goal behind an investment is to make a profit. This is especially true for real estate properties where you need to ensure that your investment will be favorable and will be popular among tenants.
With Dubai being one of the busiest, largest, and most competitive real estate markets in the world, it is no wonder that it attracts the attention of investors from around the globe. As such, if you want to thrive in the real estate market of Dubai as an investor, you have to make sure you comprehend each element to accurately calculate your Return on Investment (ROI).
Understanding ROI
ROI refers to the financial outcomes that you can derive from an investment property over a specific time, denoting the cumulative loss or gain incurred. The higher the ROI, the more profitable it is for your investment. Having a distinctive understanding of the ROI can help you determine how lucrative investing in a property in Dubai can be for you.
Comparing different properties to assess the best return will ensure your investment is made at the right place. Employing a smart investment strategy will allow you to yield better returns for your investment and you will make the most out of your deposition. You need to deduce how you can rent out your property, resell it at a better price, and use it to secure funds from volatility.
Guide to Calculate ROI for Dubai Properties
The crux of successful real estate investment lies in the skills of meticulously calculating investment returns. In Dubai, ROI is calculated by determining the percentage of net profit relative to the total cost of the investment.
You need to consider the cost of the property which will include all the initial fees, the annual expenses including the association fees and maintenance, the expected rental annual income, and the appreciation value of the property.
Calculating the Cost of the Property
The first order of the business is to calculate the overall cost of the property. To determine this, you need to consider the purchase price, the closing costs which include agent commission and registration fees, and the maintenance and renovation cost that is initially incurred. This will serve as the foundation for all the other upcoming decisions and it should be a key factor in assessing whether the property you are investing in is worth your money or not.
Determining the Annual Rental Income
The next step in the process is determining the annual rental income that you want to set on your property for your tenant. A lot of factors will influence your decision here. For instance, the location will heavily determine the amount of rent you can charge since prime locations such as Palm Jumeirah, Downtown Dubai, and Dubai Marina will yield a lot of interest due to their convenient proximity to business and urban amenities.
Assessing the Annual Expense
Assessing the annual expense requires you to properly manage the cash outflow that your property demands. You need to take care of service charges, maintenance fees, insurance money, and property management fees, among others. This will include everything from plumbing to electrical wiring, window treatments to water heater, garage maintenance to rooftop maintenance.
Analyzing the Net Profit
You need to analyze how much net profit you are earning from renting your property. To determine this, you need to subtract the overall annual expenses from the annual rental income. Ideally, you need to ensure that the annual rental amount is at least 5-6 times the amount of your overall expenses if you want a favorable profit. Otherwise, in a market like Dubai, the deal will not be feasible enough for you to survive.
Comprehending the Fee Structure
The next order of business is to comprehend the fee structure for which you need to keep in kind several factors, both internal as well as external along with various extenuating circumstances. You need to know that investments on a Dubai property often come with a DLD (Dubai Land Department) fee which is around 4% of the total property value that you have purchased.
Furthermore, it also will come with a real estate agency fee which is around 2% of the total property value. Depending on the type of property you have purchased, you need to bear the maintenance fee. There are also service charges which will vary from community to community. In addition, if you are hiring a company to take care of your rentals, then you also need to bear the property management fees.
How to Maximize ROI on Properties in Dubai?
To maximize the ROI on your property in Dubai, you need to consider certain key factors, the primary among them being the following.
Keep in mind that these will come in handy if you are considering property flipping as well which is often considered a smart investment strategy wherein you pick a property, purchase it, renovate it, and then resale or rent it out as per your convenience.
Location
As we stated earlier, this is the most crucial aspect that will determine everything from the cost of the property to how much rent you can charge. The profit that you will yield will heavily depend on how prime of a location your property is situated in.
Keeping yourself updated with reliable property directories will help you in scouting the best locations and the best property available.
Condition of the Property
Well-maintained properties will tend to rent for higher prices and will attract the attention of tenants and buyers. There are two ways of looking at it. If you want to buy a property that doesn’t have a lot of amenities and is not in the best condition, maybe you can get it at a lower price. You can then renovate it as per your budget and make it a lucrative resale or renting option.
Else, you can already buy a well-maintained property and pay a huge amount at the beginning and not have to worry about expending on renovation.
Pricing and Financing
You need to thoroughly research before deciding on the property you want to invest in. Having clarity regarding the present state of the market value in similar neighborhoods will help make you the smart choice.
At the same time, you also need to consider the financing options and if you are going the mortgage route, then pick one that suits your preferences. Keep in mind that a high-interest rate can dramatically lower the ROI on the investment.
Type of Property
Deciding the type of property is crucial in a place like Dubai which already has a booming real estate business that grabs the attention not only of the country but the world.
Residential properties such as villas, apartments, and townhouses have a higher rental yield than commercial properties such as retail and office spaces. But in the long run, commercial properties tend to have a higher potential for capital appreciation.
Economic Conditions and Global Trends
The economic condition of the Emirate will dictate the performance of the real estate market. So, it is crucial to find the best time to make your investment. You can expect a better capital appreciation and rental yield when the economy is favorable for commercial and housing spaces which are ultimately going to support the real estate market.
The global trends of inflation and rising or falling interest rates must be carefully considered as well to ensure you achieve a better ROI. Staying updated with global trends will invariably help you in making a wise choice.
Government Policies
The government of Dubai has formulated numerous policies to secure the real estate market of the city. This includes the 10-year residency visa and the golden visa for investors. You need to stay updated on the latest policies to ascertain the impact of the real estate market on your purchase.
Conclusion
When you are investing in a property in a place like Dubai, you have to prepare yourself to dip into the highly competitive environment of the city’s real estate market. Scouting the best property in a prime location, managing the external and internal expenses, flipping the property, and renting and reselling it at a worthy amount are crucial to ensure your investment is a profitable one.
So, practice caution, thoroughly research the market, and follow the aforementioned guide to make sure you have a profitable return and a feasible deal in your hand.