There are many lands for sale available in the real estate market, currently it is so easy to buy one that you can even do it online in a few steps, however, even if the price is low or it is an offer, you must make sure it is profitable.
Knowing the profitability of any investment you want to make will be the first step to protect your capital and choose the project that will generate the highest returns.
As we have mentioned in other articles, buying real estate is one of the best investments you can make, especially if its characteristics favor the increase of your capital gain and generate a considerable return.
In this article Blue World City will tell you what profitability is, what types exist and some tips to obtain it on your land or real estate.
What is profitability?
Profitability is any economic action that produces a profit in a certain time.
In short, profitability refers to the benefits that are obtained or can be obtained from an investment. It measures what percentage of the invested capital has been recovered, as well as for future projections.
In business – as well as in investment – this concept is important, as it is an indicator of the development of an investment, as well as its ability to remunerate the resources used.
As an example, we can mention that a company is considered profitable when its profits are greater than its expenses, and the difference between the two is acceptable. Another example is when a product generates more revenue than costs.
There are several types of profitability depending on the investment to be made. Next, we will tell you in detail about each one.
The economic profitability refers to the profit that the company obtains on average for the amount of investments made. This is represented in percentage terms.
When the profitability of a company is obtained where expenses, interests and taxes have not been subtracted, it is known as: EBITDA (Earnings before interest, taxes, depreciation and amortization) which is an indicator used to assess the capacity of the company considering only their productive activity.
Some companies in search of the best strategy to increase their economic profitability choose to increase the prices of their products or services and reduce costs, however, this is not applicable in all economic activities.
To calculate the economic profitability the ROA (return on assets) or profitability ratio of the assets is used. This is the result of multiplying the profit obtained from the sale by the times it has been sold.
This type of profitability refers to the profit obtained by the entrepreneurs, that is, the partners of the company.
What does it measure? The ability of the company to generate income from the funds it possesses, this makes it a closer measure than the economic one.
It is calculated using the capital ratio, also known as ROE (return on equity). This calculation is the relationship between the net profit and the net worth of a company.
How can it be improved? There are three ways to do it:
- Increasing the margin.
- Increasing sales.
- Decreasing the asset.
In any case, debt can also be increased so that the difference between assets and equity is greater.
Social profitability refers to the benefits that a company can obtain from a project or investment made by a company.
Unlike economic profitability, social profitability can be socially profitable but not for the investor or entrepreneur, an example of this is the construction of infrastructure such as a road.
Now that you know the types of profitability that exist, we will briefly talk about the indicators that are used to measure profitability.
General profitability indicators
- Absolute return: This has the characteristic that your funds are invested in various assets on the money market, for example, fixed income or variable income.
- Accumulated profitability: It is the total balance of the benefits obtained during a period of time, including those derived from the same investment in previous periods.
- Economic profitability: It is independent of the financial structure and is calculated from the assets and the invested capital.
- Financial profitability: It is the benefit that is obtained from the resources that have had to be invested to obtain said benefit.
- Commercial profitability: It is also called profitability on income and is what evaluates the commercial quality of the company.
- Money profitability: It is obtained through the investment of a certain amount of money.
- Expected return: Also called NPV, it is considered the sum of the random variables, and it is a way of evaluating investments in which some data is not known with certainty.
- Guaranteed profitability: It is a profitability that is assured for a certain period of time. It is common in guaranteed pension plans or guaranteed savings accounts.
- Geometric profitability: This is calculated in a simple or arithmetic way and corresponds to the amount that would be deducted by means of a compound capitalization.
- Risk-free profitability: Refers to those carried out through risk-free operations such as bank deposits.
- Nominal profitability and real profitability: Both are related to inflation, since the nominal one is not affected by it, unlike the real one.
Profitability indicators according to calculation time
- Annual profitability: It is the percentage of profit or loss obtained from an investment within a year. This allows you to make comparisons of the performance obtained over the years.
- Average profitability: It is the sum of all the profitability obtained in a period of time, which is divided by the number of profitability, the result being an average. When the period of time is one year or one month, they are known as the annual average and the monthly average.
Another way to classify them is:
- Gross profitability: To calculate it, the gross result of an activity must be divided by the sales made in a period of time.
- Net profitability: It is calculated by dividing the net result of the company by the sales made in a period of time.
How to calculate the profitability of a property?
Once you know the types of profitability and their indicators, it will not be difficult to calculate it in your property. You only need to have some values depending on whether it is a property for sale or for rent.
In the case of a sale, you need to know these values to perform the calculation:
- Initial value: It is how much you invested in the property.
- Present value: It is the amount in which you are selling it.
To calculate it, the initial value must be subtracted from the current value and divided by the initial investment to later multiply it by one hundred.
To calculate a rental property, you need to have these values:
- Annual income: The sum of all payments received during this period.
- Maintenance expenses: The sum of the expenses incurred, such as remodeling among other services.
- Initial value: The amount you invested in the property.
The calculation process is to subtract the maintenance expenses from the annual income and divide the result by the initial value, and then multiply this by one hundred.
It is important that you take into account the expenses made in the deed process and the taxes that are paid.
Calculating the profitability of your property will allow you to know the profits you are obtaining, as well as if it is beneficial to sell or rent at that time.
For the profitability of your property to be greater, it must meet certain requirements that will increase its capital gain and make you obtain a higher profit margin. Next, we will talk about what they are.
How to increase the profitability of a land?
When buying a property with construction or land you must take into account these factors, which will allow you to obtain greater profits in the medium and long term.
As we have mentioned in other articles, location is the key to achieving greater capital gains and securing your investment; Whether it is a residential or commercial land, acquiring it in an area with economic growth will be a guarantee for profit.
Depending on the city where you want to acquire there are areas where the land acquires greater value and, in less time, for example, in the city of Mérida, the northern area is ideal for high-end real estate projects, the eastern area for commercial projects and the area west for industrial projects.
You must study the possible locations and land available to acquire, above all you must make sure that they are urbanized land as they provide greater advantages.
The privately owned land is safer than ideals and give legal certainty to the buyer.
2. Buy in pre-sale
There are many offers of land and properties in the real estate market, as well as ideal places to start a business, since one of the best ways to start is with land.
To choose the best option, in addition to considering the location, taking into account the price is a factor that can determine a good or bad profitability.
Many real estate companies, such as BMF Inversions, have pre-sale land with privileged locations, which provide the opportunity to achieve a higher profit margin for acquiring with a price below the market value.
For this to be functional, it is necessary to carry out market studies that guarantee the returns that can be obtained, and project the developments that are in process or will be carried out in the future in the area that can help the capital gain of your property increase.
3. Accessibility and services
In addition to being in an area of the city with high added value, your land must have easy access both vehicular and pedestrian, because if it is a business or with a view to renting as such, this will be a fundamental characteristic for it to be profitable.
Among other things that you should consider, are the services of the property as well as those nearby, that is, that it has the basics such as drinking water, electricity, drainage network, public lighting, among others.
Likewise, it is recommended —depending on the type of business— that it is located near residential areas, schools, hospitals or forms part of a commercial complex.
This will allow the property’s value to increase more easily over time.
If you do not have immediate plans to build a profitable business on your own, it is best to put your land to work and earn income without investing too much with it.
One of the most used options is to rent land to franchises or small businesses that are looking for a space to start or expand.
If your land does not meet the necessary characteristics to be leased by a franchise, don’t worry we have prepared an article with 7 business ideas to make money with a land.
Renting your property if it is not in use has several benefits, including generating extra income as time passes and its value increases. You also protect it from invaders by keeping it in constant use.
5. Sale or retirement estate
If at the time of sale your property has the characteristics that we mentioned above, you will be able to obtain a considerable profit margin, especially if you have made sure of this by carrying out a calculation to make the estimate before acquiring said property.
In addition to the sale, using your retirement savings to improve the land or simply to buy it will be a great way to guarantee your retirement years and provide your family with an estate.
Without a doubt, investing in real estate is one of the types of investment that can be made at any age, and one of the safest.
Real estate, the best investment
Now that you know the economic benefit of calculating and knowing the profitability of a property, it only remains to choose the land that best suits your business project.
At BMF Inversions we have more than 25 years of real estate successes in the best cities of the Mexican southeast such as Cancun, Mérida and Playa del Carmen.
Learn about our commercial and industrial lot projects, which will allow you to increase the chances of obtaining high yields thanks to its strategic location, since the delivery characteristics facilitate short-term construction.