You have probably seen the term “return” come up before. Especially if you are reading up on it because you want to start investing, you will come across this term a lot. But what does return mean? And how can you best calculate your return on different types of investments? We have a clear explanation about this subject set out for you in the article below.
What is return?
First of all, an important question is: what exactly does return mean? If you search for “meaning return”, you will probably come up with the definition “return on an investment”. This is a correct meaning, but may still be quite abstract to you.
A more simplified explanation is that return is the profit you make from your investments. So basically just what you earn from investing your money in a certain financial product, such as shares, bonds or a fund.
The return is usually calculated over a certain period of time. You can choose over which period you want to calculate your return. The height of the percentage of the return, also called the ‘rate of return’, therefore also depends on the period over which you calculate it.
In addition, the return can of course also be negative if you lose money on your investments. Thus, the rate of return can be expressed as either a positive (gain) or negative (loss) number. This can be done in absolute numbers, but mostly it will be expressed in percentages (the rate of return).
Why calculate return on investment?
Calculating return is something you do for a reason, of course. If you make investments, it is actually very important and useful to calculate your return. Not only before you make the investment, but also during the process of your investment.
Calculating your return prior to your investment is pretty logical. You want to know how much you can earn from a particular investment and whether the investment is worth it. But also during the process of investing, it is useful to keep an eye on your return. By watching and analyzing the investment you can, for example, keep an eye on whether your investment is paying off, whether it is time to sell your stock or whether your pre-made calculation of the return is still correct (perhaps circumstances have changed).
How to calculate return on investment?
Not only an amount of money can generate a return, but you can also make a profit with other objects that represent a value. For example, you can also gain returns from real estate such as a house, a vacation home or a piece of land. Or from solar energy generated by solar panels!
Calculate return on real estate
Besides investing in stock (or bonds) you can also invest in real estate. By buying real estate you can obtain passive income (such as rental income) and obtain return through the increase of value of the property. Calculating the return on real estate is very easy.
For example, if you have invested by buying a vacation home, you can easily calculate what you will eventually earn from this. The formula for calculating this return is as follows:
Return on vacation home = (the annual rental income / the total purchase price of the vacation home) x 100 percent
Note that this is the simplified method of calculating the return. It only calculates the gross return. If you want to calculate the net return, then you have to take into account all additional costs in addition to the purchase price.
Want to know more about how to calculate the net return or about buying real estate in general? Then please visit our real estate page.
Calculate return on solar panels
In conclusion, you can obtain returns not only from real estate or something that represents a financial value (such as stock), but also through smart purchases such as renewable energy. Obtaining a return by means of solar panels, for example, is an attractive way of obtaining your capital: you make a profit and at the same time contribute to a more green and sustainable world.
Also with solar panels you can calculate your return by means of a return formula. Calculating the solar panel return is a little more complicated than calculating your return on shares or real estate. The return depends on the location of your roof, the angle of your roof and the amount of shade and sun. The highest return is of course achieved if your roof is in full sunlight for a long period of the day. But even if this is not the case, it is worthwhile to calculate whether you would be better off with solar panels.
Yet the efficiency of solar panels can also be calculated using formulas. The easiest way to calculate this is by filling in a table on the website of various solar panel providers. If you compare these numbers you can see what approximately your return will be.
Finally, what you should not forget is that you will always pay wealth tax on your assets. So don’t be blinded by the return you get and don’t forget to include your capital gains tax!
Fortunately for most of you, the capital gains tax is quite low for small savers and investors. This is because the Tax Authority determines your wealth tax on the basis of a fictitious return.
This fictitious return (also called fixed return) is, as it were, an estimate made by the Tax Authorities of the return you obtain. This wealth tax is therefore not based on your eventual return, but on the return that the Tax Authorities think you will/could obtain.
It is even the case that if you stay below the exemption limit, you do not have to pay anything at all. And this limit went up in 2021 as well! So this probably isn’t a big expense that dwarfs your investments, but it’s still something to keep in mind if you want to calculate your return.
Want to know more?
Calculating your return to find out how much you earn with your investments is therefore not very difficult. Using (mostly) simple formulas, you can find out whether a particular investment is worthwhile.
Are you still not quite sure whether investing your capital is right for you? Or would you like to know more about a certain type of investment? Then you can subscribe to our newsletter, with which we will keep you informed about the various forms of investment and provide you with the best advice!