Return on Investment (ROI) in Real Estate Projects: how to calculate, assess risks, and decide with confidence
- Ana Carolina Santos
- Nov 21
- 3 min read
In a few words: ROI is only reliable if calculated with real cash flows, coherent timelines, and complete costs (design, permits, construction, financing, taxes, and exit). Using scenarios and sensitivity analysis is what distinguishes a “good deal” from an informed decision.
Strict ROI = complete costs + realistic timelines + quantified risks.
What ROI is and why it matters in real estate
Return on Investment (ROI) measures the profitability of a project relative to the capital invested. In real estate, it is used to compare opportunities, validate feasibility, and support decisions on purchase, development, rehabilitation, or leasing.
Basic formula: ROI = (Net profit / Total investment) × 100
To compare alternatives, it is essential to normalize over time (annualize) or better, use complementary metrics like IRR and NPV.
What is included in “Total Investment”?
To reflect reality, include all costs throughout the lifecycle:
Acquisition: price, IMT (property transfer tax), stamp duty, deeds, commissions
Design and technical: architecture, specialties, coordination, fiscal/works director
Municipal procedures and fees: licensing/prior notification, urban fees, TRIU, compensations, and deposits
Construction and rehabilitation: contract, price reviews, contingencies (7–15%)
Accessibility and compliance: solutions and adjustments ensuring technical conformity (impacting costs and timelines)
Infrastructure and connections: water, sanitation, electricity, telecommunications
Financing: interest during construction, banking commissions, spreads, and amortization costs
Insurance and safety: construction, liability, SCR
Marketing/exit: marketing, mediation, deeds, possible discounts
Operational taxes: IMI (property tax), municipal surcharges, VAT (if applicable), capital gains taxation
Advice: create a cost grid by phases (acquisition, design/licensing, construction, marketing) and structure Base, Conservative, and Optimistic scenarios.
What is included in “Net Profit”
Sale: Total sale price less selling costs and taxes
Lease: Net rents during operation period, less operating expenses and taxes
Incentives: Subsidies or tax benefits, if any
Residual value: If retaining the asset, estimate a prudent exit value (discounted for risk and future transaction costs)
Four metrics to accompany ROI
Payback: time to recover investment
Annualized ROI: compares projects of different durations
IRR (Internal Rate of Return): profitability considering the time value of money
NPV (Net Present Value): value created after discounting capital cost
Advice: set a “hurdle rate” aligned with project and local market risk.
Step by step: practical calculation
Survey and validation:
Check planning framework (use, indices, constraints)
List technical constraints (accessibility, SCIE, acoustics, thermal) impacting area and costs
Confirm financing costs and municipal decision timelines
Schedule and cash flow:
Distribute costs and revenues monthly/quarterly
Include bank grace periods, interim interest, and contingencies.
Anticipate timeline slippages (buffers 10–20%)
ROI and annualization:
ROI = (Total revenues – Total costs) / Total costsAnnualized
ROI ≈ (1 + ROI)^(12/months) – 1
Sensitivity and scenarios:
Test: +10% construction cost; –5 to –10% sale price; +6–12 months delay
Identify break‑even: price/cost point where ROI is zero
Decision:
Compare with minimum desired rate and investment alternatives
Adjust program (typologies, phasing, CAPEX) to optimize risk-return
Critical risks to control
Market: absorption, competition, purchasing power, interest rates
Licensing: processes, document requests, external opinions
Construction: contractor availability, price reviews, supply chain
Regulatory: technical requirements imposing constructive solutions (may reduce sellable area and/or impose extra costs)
Financing: credit conditions, covenants, drawdown timelines
Tax: tax changes and applicable benefits
Advice: maintain explicit and governed cost and timeline contingencies; update assumptions quarterly.
Practical application examples
Development for sale: margins strongly depend on exit price and sales cycle; IRR penalizes delays in construction and licensing.
Rehabilitation for rental: also evaluate cash-on-cash and net yield; payback and IRR are sensitive to capital cost and maintenance.
“Buy to convert”: analyze usable area loss, necessary demolitions, and structural reinforcements; compare with ground-up acquisition.
Best project and management practices protecting ROI
Realistic program: align typologies with local demand and average price
Value engineering: construction solutions optimizing cost/benefit without sacrificing performance and compliance
Contracting: closed specifications, comparable proposals, retentions, and milestone payment plans
Monitoring: monthly cost and timeline reports, change and claims management
Tax planning: corporate structure, VAT/IRC, benefits and exemptions when applicable
Key questions before proceeding
Do annualized ROI and IRR exceed my hurdle rate?
Do conservative scenarios keep NPV positive?
Are there program alternatives (mix of typologies, phasing) improving risk/return?
Is the exit strategy validated with current market data?
Final advice
Work with current market sale prices and construction costs, updating quarterly.
Never approve investment based on a single scenario. Always require sensitivity and risk analysis.
Formalize governance: decision gates, go/no-go criteria, CAPEX and timeline variation limits.
To consider
Winning real estate projects combine budgeting rigor, timeline realism, and risk management discipline. ROI is a starting point; the right decision stems from reliable cash flows, positive IRR/NPV, and a solid execution plan.
