How to calculate your rental returns27/02/17
As we've already described, rental property can be a useful investment tool at a time when bank interest rates are low and equity markets are stagnant. It does, however, tie up your money for a significant period of time, so it's crucial that you do the sums before committing yourself. Once you've done the necessary calculations, you'll know whether you are comfortable with the cash commitment and will be able to mange your investment properly.
When planning to invest in rental property, the importance of calculating the net return on your capital expenditure cannot be understated. To help you do this, we thought we'd explain how to calculate your chosen property's annual return:
Calculating the return from an investment property
Before you get started, it's important to remember that the return we're working out here is based only on the value of your property and your mortgage. It doesn't include maintenance costs, capital repayments or rates and taxes (you should include these last two in your rental calculations).
The basic calculation
To work out your annual return on investment, subtract your annual mortgage cost from your annual rent and then work this sum out as a percentage of the deposit you put down, plus buying costs (legal fees and stamp duty).
If you buy a property for £200,000 with a 25% deposit, then you'll need a mortgage of £150,000. At 5% interest, you'll make interest payments worth £7,500 per year.
This figure should be taken away from the annual rent you receive, which for the sake of this example, we'll say is £1,000 per month or £12,000 per year.
£12,000 - £7,500 = £4,500
On a £200,000 property, your buying costs may be £2,000, so the next step is to calculate £4,500 as a percentage of the £50,000 deposit plus £2,000 costs.
£4,500 / £52,000 = 0.087
0.087 x 100 = 8.7%
In this example, the basic annual return on your investment is a healthy 8.7%.
This means that every year, you'll receive back 8.7% of the money that you used to buy the property.
How does knowing the annual return help?
Knowing this figure enables you to decide whether investing your capital into property is the right move for you, particularly in terms of managing your cashflow.
If you'd like more advice, please get in touch. We're experts in advising on both the purchase and the ongoing management of your property.