Return on Investment
Often referred to as ROI, this is the beneficial gain to the Investor as a percentage of the original capital.
Put simply, Return on Investment is the amount you get back against your original investment.
What makes property investments more interesting is that in most cases your investment is a lot lower than the purchase cost. This is because when we mortgage a property, the deposit paid would be the original investment.
For example if you were to buy a house for, say, £200,000 and you took out a 75% LTV mortgage, then you would be borrowing £150,000 and your deposit would be £50,000. The return would be calculated as the net income you receive, so if you were receiving £1500 pcm (£18,000 per year) rent and the mortgage payments were £8250 per year, then your net return would be £9750. This would vary slightly if it was a leasehold property and you had service charges and ground rent to pay. But for the purpose of this example we’ll keep things simple!
The return against the original investment would be calculated as follows:
£1500 (rent pcm) x 12 = £18,000 rent per year
Less the operating costs (mortgage payments) of £8250.00
Net return = £9750
/ £50,000 (deposit)
x 100 (for percentage) = 19.5% Return on Investment
If this was a leasehold property and we had say £1200 per year to pay for ground rent and service charges, then this would have an effect on the Return on Investment. Due to this, it would then drop to a net return of £8050 and a return on Investment of 16.1%
What Return on Investment some I look to achieve?
Most Investors wouldn’t normally look at anything with a Return on Investment below 12%. Therefore many aim much higher, but as with Yields, you have to look at the Investment as an overall package.
When would I consider anything with a lower Return on Investment?
Again, a matter of choice. Most notably, you have to weigh up the over-all Investment and why you are buying the property. For example, if you were buying a property with a heavily discounted price that you intended to “Flip” then Capital Growth then becomes the main issue as the investment is much shorter term.