Four real estate return formulas, a complete example, and the list of expenses that turns a 9% return into a 4% return.
To calculate the actual real estate return on an investment apartment, you need to distinguish between four figures that are often confused: the gross return (annual income divided by purchase price), the net return (after all operating expenses), the return on invested capital (which includes closing costs, not just the purchase price), and the cash-on-cash return (what actually ends up in your pocket if you financed part of the purchase). The difference between the first and the last is often more than half, and that’s where most of the projections out there fall apart. The rule is simple: gross return is used to compare properties with one another; no other decision should be based on it.
The Four Formulas for Real Estate Returns
1. Gross Profitability
(Ingresos anuales / Precio de compra) × 100
It's the most commonly cited and the least useful. It ignores all the costs involved in maintaining the property.
2. Net Profitability
((Ingresos anuales − Gastos anuales) / Precio de compra) × 100
It already factors in the transaction. This is the first figure worth working with.
3. Return on Invested Capital
((Ingresos anuales − Gastos anuales) / (Precio + costos de cierre + mobiliario)) × 100
The most accurate option for a cash purchase, because the denominator is the amount you actually paid.
4. Cash-on-cash
((Ingreso neto − cuota anual del préstamo) / capital propio aportado) × 100
What matters is whether you took out a loan. It may be higher or lower than the previous amount, depending on the cost of the debt.
What expenses should be deducted to calculate the actual return on real estate?
This is the point where optimistic real estate return projections fall apart:
- Condominium maintenance, covering all aspects. In developments with a master plan, there are usually two fees.
- Rental agency fee, if you delegate management.
- Cleaning between stays and restocking of amenities.
- Utilities: electricity, water, internet, television.
- Real estate wealth tax, unless exempted by Confotur.
- Income tax on rental income.
- Property and Contents Insurance.
- Corrective maintenance: air conditioners, appliances, plumbing.
- Replacing furniture. In coastal areas, salt air shortens the lifespan of everything.
- Vacancy. Months without guests also come at a cost.
The last two are the ones that almost no one factors into their budget, and they are the ones that erode profits the most over a three-year period.
A complete example, with hypothetical figures
Let's take an apartment priced at US$160,000, purchased with cash, with US$12,000 in closing costs and US$15,000 in furniture. Total capital disbursed: US$187,000.
Let's assume a 60% occupancy rate for the year at an average rate of US$130 per night:
- Overnight stays: 365 × 0.60 = 219 nights
- Annual gross income: 219 × US$130 = US$28,470
Estimated annual expenses:
| Concept | Annual amount |
|---|---|
| Operator commission (20% of gross revenue) | US$5,694 |
| Condominium Maintenance | US$3,600 |
| Utilities (electricity, water, internet) | US$2,400 |
| Housekeeping and Amenities | US$2,628 |
| Insurance | US$900 |
| Corrective Maintenance and Replacement | US$2,000 |
| Total expenses | US$17,222 |
Annual net income: US$28,470 − US$17,222 = US$11,248
Now, the four key figures for real estate profitability:
| Metrics | Calculus | Result |
|---|---|---|
| Gross Profitability | 28,470 / 160,000 | 17,79 % |
| Net Profitability | 11,248 / 160,000 | 7,03 % |
| Return on Invested Capital | 11,248 / 187,000 | 6,01 % |
| Years to Recoup the Capital | 187,000 / 11,248 | 16.6 years |
Figures calculated based on educational assumptions. They are not a projection for any specific project.
Take a look at the jump: from 17.79% gross to 6.01% actual. That's the gap between the number that appears in sales presentations and the one that will determine your decision.
What happens if you take out a loan?
If, instead of paying in cash, you put down US$60,000 and finance US$100,000, the calculation changes. Assume an annual loan payment of US$10,800:
- Equity: 60,000 + 12,000 + 15,000 = US$87,000
- Cash flow after debt: 11,248 − 10,800 = US$448
- Cash-on-cash: 448 / 87,000 = 0.51%
Leverage does not automatically improve returns: it only works in your favor when the cost of debt is lower than the asset's rate of return. In this hypothetical example, that is not the case, and the cash flow almost disappears. The Central Bank publishes the benchmark rates for the Dominican financial system.
Where do you get the attendance figures?
Your real estate profitability calculation is only as good as the quality of this input data:
- Rate per night: Look at actual comparable listings in the same area and with the same number of rooms, across different seasons.
- Occupancy: Ask the operator for historical data on similar units—not just a promise. And use a conservative scenario in addition to the expected one.
- Maintenance: in writing, from the project management team.
- Closing costs: Calculate them using the breakdown of the ITBI and actual costs.
- Operator fee: Confirm the basis on which it is calculated, as explained in the property management guide.
How to interpret the numbers for an Airbnb in the area—without any promises—is covered in our article on how much an Airbnb earns in Punta Cana.
What about capital gains?
Property appreciation is not included in the calculation of real estate returns and should not be confused with them. These are two distinct types of returns: one is annual cash flow, and the other is capital gain upon sale, which is realized only on the day of the sale and depends on market conditions at that time.
Add them up if you want, but calculate them separately, and never use an estimated capital gain to justify a negative cash flow.
Frequently Asked Questions
What is a good return on investment for an apartment?
There is no universal figure: it depends on the market, the opportunity cost of your capital, and your time horizon. The important thing is to always compare the same metric across options—and make sure it’s the net figure or the return on invested capital, not the gross figure.
Why Is Gross Profit Margin Misleading?
Because it ignores all the costs associated with owning the property: maintenance, management fees, utilities, taxes, insurance, vacancy, and replacement costs. In the example given in this article, the difference between gross and net is nearly twelve percentage points.
What is cash-on-cash?
It is the annual cash flow after debt payments, divided by the equity you contributed. This is the key metric when you finance part of the purchase.
Should I include the capital gain in the calculation?
Separately. Appreciation is a capital gain realized upon sale and only materializes at the time of sale. Mixing it with annual cash flow is the most common way to justify an investment that isn't viable on its own.
How many years does it take to recoup the investment?
It is calculated by dividing the total paid-in capital by the annual net income. Based on the assumptions in the example, it comes to about 16.6 years, not including appreciation.
At Garrigó Real Estate, we work with you to perform this calculation before you make a reservation, using the specific property's figures and both a conservative and an expected scenario.
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