How should I measure returns?
Successful property investors tend to calculate returns from property using a simple net return calculation. A gross rental return is the total amount of money your tenant pays you for residing in your property.
Your actual net return (or pre-tax) profit – is what you are left with after all your expenses have been taken out.
As you hold your investment, capital growth can also be factored into the annual profit figure and you should see your return on investment (ROI) steadily increase.
It is important that you are clear on your projected net returns (income), yield and total return on investment before committing to an investment property. Many people quote that property in the UK doubles every 7- 10 years. It is more realistic to say prices can double every 7/10 years.
Each property is different and although typically this is the case if you do buy at the height of the market it may take much longer than this to achieve.
Buy and hold strategy why it works so well
A strategy to buy and hold property works for many investors and allows them to build wealth from property. This strategy will always work for you if you are able to maintain a positive cash flow.
The reason this strategy works so well is because you can leverage your money by borrowing from the bank and, as the property grows in value, use it to buy other properties. Then when inflation is also factored in the impact is powerful. While it steadily erodes the value of the mortgage, you see property prices are increasing as are rents due to inflation and an increased demand for properties.
When you invest in property, you benefit because the:
– mortgage amount erodes
– capital value increases
– rental profits increase
Therefore your ROI increases. This is because of the power of leverage. This is greater for property than any other asset as you benefit from growth on your borrowed funds.
At Homesale and Homelet
we can help with tried and tested spreadsheets that can calculate your mortgage amount, gross and net returns and ROI.
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