We’re going to help you understand, what is a good return on investment for a buy-to-let property, and how to calculate ROI. The Return On Investment (ROI) calculation for a rental property is an important tool for tracking the performance of an asset.
This metric will also allow you to assess whether property is a better investment than alternatives, such as equities, enabling you to plan your financial future. Return on Investment is especially useful in property investment as it reveals the performance differences between buying 100% cash or utilising a buy-to-let mortgage, thus allowing you to optimise the structure of your purchase to suit your long term goals. .
Calculating Property ROI
ROI (%) = Profit from Investment / Cost of Investment x 100
When calculating the Profit from a property investment the first step is to calculate the Annual Rental Income. The next step is to subtract the running costs of Mortgage Payments, Letting & Management fees, Service Charge, Ground Rent etc. This provides an annual Net Income figure. This net figure is then divided by the amount of Cash you Invested into the property (If you are using buy-to-let mortgage financing the Cash Invested figure is the deposit you have put into the property). The resulting figure is then multiplied by 100 to provide an ROI percentage.
Using our Holme House development in Nottingham as an example, we can asses the differences between a 100% cash purchase and a buy-to-let mortgage purchase.
Return on Investment example with a Buy-to-Let Mortgage
Holme House, Nottingham – One Bedroom Apartment – Purchase Price: £119,995
Gross Annual Rental Income: £7,800 (£650 per month), a gross yield of 6.5%
Annual Expenses
– Ground Rent: £250
– Service Charge: £1,000
– Letting and Management fee: £780
– Mortgage costs (3.5% Interest Only): £3,675
Net Annual Profit = £2,095
Cash Invested: 35% of property value or £41,998
Return on Investment = 5%
Return on Investment example Cash Purchase
Holme House, Nottingham – One Bedroom Apartment – Purchase Price: £119,995
Gross Annual Rental Income: £7,800 (£650 per month), a gross yield of 6.5%
Annual Expenses
– Ground Rent: £250
– Service Charge: £1,000
– Letting and Management fee: £780
Net Annual Profit = £5,770
Cash Invested: 100% of property value or £119,995
Return on Investment = 4.8%
In the examples above the ROI is relatively similar for cash and btl mortgage purchases. A net return of 4.8 – 5% is a highly attractive and competitive offering, especially in the current ultra-low interest rate climate. These are also very stable returns, as opposed to the volatility experienced in the equity markets.
It is also important to highlight that these figures provide a snapshot of the performance of a particular investment. They do not allow for rental or capital appreciation. This refers to the increase in the rental income and the growth in value of the property. As rents increase the ROI will also increase.
Finally, it is key to note that the ROI is determined by the net income relative to the value of the property. This is why Prosperity have offer developments in key regional market locations where the rental yield available offers strong returns. Many property investors are currently seeking to diversify their portfolio away from London where ROI can often be less than 3% due to the exceptionally high property prices.
Content by Samuel Richards
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