Return on Investment
April 2nd, 2010
Your Return on Investment (ROI) is always key to making the decision to invest whether this is in the Bank or Building Society, Stocks and Shares and Investing in Property. Key to this is finding the right rental area to buy in as with purchasing a property for your own accommodation buy to let is all about location, location, location.
Many investors think that you have to buy a property in the best areas of the city to be able to make a good return on their investment, but this isn’t always the case, this is not always the case. A disadvantaged area is not necessarily a poor rental area, many of these are undergoing regeneration and have an incredibly high demand for rental properties, and very low purchase prices, this makes them very profitable income wise and good potential for growth in the value itself.
A good knowledge of the area will also help you calculate how much rent to charge, too much, you will struggle to get tenants and an empty property gives a very poor ROI. Too little and you are guaranteed tenants but you are not maximising your ROI
Calculating your ROI isn’t as easy as looking at how much rental you will be getting each month then deducting your mortgage payments and saying that’s the return I will be getting, there is much more to be taken into consideration. Never use the Gross Yield, many property development companies use this to hide poor investments, you need to take the following regular costs into consideration
Mortgage Payments
Insurance
Maintenance Charges
Ground Rent
Letting agent fees
Happy Homes take all this into consideration when they calculate the ROI at the beginning of the process so you know exactly what you are getting from the outset. An example of how this is calculated is attached.
| Purchase | |
| RICS Valuation (guaranteed) | £87,500 |
| Purchase costs (paid for by Happy Homes) | £1,000 |
| Deposit | £21,875 |
| Mortgage valuation fee (if using a mortgage) | £395 |
| Total cash investment required (guaranteed) | £22,270 |
| Mortgage | |
| Mortgage product | 4.6% BMS 1 year tracker |
| Loan to Value | 75% |
| Value of Mortgage | £65,625 |
| Arrangement Fee (3% of Loan) | £1,969 |
| Mortgage rate | 4.60% |
| Monthly interest payments | £259.11 |
| Income | |
| Rental income per month | £475.00 |
| Expenses | |
| Buildings insurance | £15.00 |
| Letting Agent management commission at 10% | £47.50 |
| Mortgage interest payments | £259.11 |
| Return On Investment per year | |
| Positive cashflow per month | £153.39 |
| Positive cashflow per year | £1,840.69 |
| Rental ROI | 8.27% |