Do you really know your numbers? When investing in property it is easy to do quick calculations to find out whether the investment is viable or not but have you taken into consideration the full costs and income from the property. Some aspects may be overlooked and as a result the return on your property may not be what you imagined. Knowing exactly how much return you are getting on your portfolio will govern whether it is a success or not.
Many investors invest in property as it will give them a better return than if the money was sat in a bank. They calculate it by working out the yield based on the gross annual rent divided by the property value. For example a property worth £100,000 with a monthly rent of £600 the calculation would be as follows:
£600 x 12 = £7,200
£7,200 / £100,000 = 0.072 = 7.2%
Using this basic calculation the yield would be 7.2% and therefore more than the interest gained in a bank account. However this is just a rough calculation and there are other aspects which should be taken into account when investing. If you look at the real rate of return the result is different as the costs of maintenance and management are taken into account. Many people buy a property with a mortgage which means extra costs are incurred. If we source your property we charge a fee, 50% of the first month’s rent, and other letting agent fees may also be applicable. We also offer bespoke furniture packages at £900 for a one bedroom property and £1500 for a two bedroom property.
Purchase Price – £100,000
Deposit (25%) – £25,000
Mortgage (75%) – £75,000
Costs to Purchase – £2,000
Rent – £600
Mortgage @ 6% – £375
Management fee @ 10% of gross rent – £60
Monthly Operating Expenses @10% of gross rent – £60
Total monthly expenses – £495
Total cash flow (Rent – Total Expenses) – £105
Total money into deal (Deposit + Costs) – £27,000
Annual cash flow – £1,260
True Rate of Return (£1,260 / £27,000) – 0.046
The RRR is therefore – 4.6%
The Real Rate of Return is therefore a more exact reflection of return and will help you make more informed investment decisions. Resulting in investing in properties which will give a higher rate of return as it is not always possible to rely on the property’s value increasing. You should therefore run these calculations on your properties to see if they are profitable and have a positive return. If you have any questions or queries regarding the return on investment don’t hesitate to speak to us.
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