What is ROI for home loan and how to calculate it

The term ‘return on investment’ is not limited to the financial circles of our cities; or to online groups that solely consist of people who work in the financial domain. Over the years, the term has earned several connotations that mean ‘benefits’ or ‘advantages’ to the general public. The term, however, has a very specific meaning in the context of real estate investments. We discuss the meaning of ROI for a home loan and show you ways to calculate the current ROI for your home loan.

What is ROI, and how do we calculate it?
 

The return on investment is a means to measure the profit earned through that investment. This profit gained from an investment, when represented as a percentage of its initial cost, is called the ROI of an investment. Generally, there are two ways to calculate the ROI:

1. Cost method
   
   To calculate the ROI of an investment through the cost method, you must divide the investment gain in a property by the property’s initial costs. This method of calculating a property’s ROI is called the cost method.
   
   
2. Out-of-pocket method
   
   The out-of-pocket method of calculating ROI can be used to calculate your current ROI for a home loan. Calculating the ROI through the out-of-pocket method requires you to calculate your ROI by deducting every expense that you incurred to buy, maintain, and sell your home. Let us understand how home loan ROI is calculated in detail in the next section. 

How to calculate home loan ROI?
 

As mentioned in the previous section, home loan ROI is calculated using the out-of-pocket method. Let us understand this method in detail, and with an example. Let us assume that you bought your home at a price of ₹70 lakhs; and 4 years later, sold it for ₹75 lakhs.

Now, let us assume that during these 4 years, you earn a rental income of ₹1.5 lakhs every year; and the cost of maintaining your home, of carrying out repairs and upgrades comes to around ₹ 50K every year. Hence the total rental income earned at the end of 4 years is ₹6 lakhs and the total cost of carrying out repairs is ₹2 lakhs. In addition to these expenses, let us assume that you expend ₹3 lakhs in total towards stamp duty charges, registrations, etc.

In this scenario, your actual investment is the sum of the initial investment (₹70 lakhs), the cost towards stamp duty charges (₹3 lakhs), and your rental income (₹1.5 lakhs), which comes to ₹74.5 lakhs. Your total income is the sum of the selling price of your home (₹75 lakhs) and your rental income (₹6 lakhs) which is ₹ 81 lakhs. Hence, your home loan ROI is approximately ₹6.5 lakhs over a 4-year period.

Things to keep in mind while calculating home loan ROI
 

The previous section gave an overview of how home loan ROI is calculated. In this section, we give you a few tips to analyse your home loan ROI better and infer learnings from it. Read on.

1. Invest for the long term
   
   A lot of thinking goes into a real estate investment. As an investor, you must consider factors such as other upcoming infrastructure and the builder’s reputation among other things. However, you must also remember that real estate investments are meant to be long-term investments. Even in the example that we used to illustrate the calculation of home loan ROI; you must have noticed how small the ROI number added up to a lot over a four-year-long period. Keep in mind that a real estate investment is an investment for the long term.
   
   
2. Know about the benefits of a home loan
   
   If you opt for a paperless home loan at a comprehensive interest rate like the one offered by IDFC FIRST Bank, your initial out-of-pocket income will simply be a fraction of the cost of your home. To add to this, of course, are the various tax benefits of opting for a home loan. Read our article on home loan types to know more.
   
   
3. Conduct a risk assessment
   
   Conducting a risk assessment will help you make the most of your real estate investment. Since real estate investments are cost-intensive and offer low liquidity, you must consider every risk before taking any investment decision.
   
   
4. Calculate your home loan ROI methodically
   
   If you follow the steps mentioned in the earlier sections of this article, you will be able to methodically calculate your home loan ROI. Remember, your actual home loan ROI is the ROI that is obtained by removing all the expenses made to purchase, maintain, and sell your home.

We hope this article proved useful in calculating your home loan ROI. If you wish to know more about IDFC FIRST Bank home loans and their varying features, visit the website.

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.