The Property Investment Corner: Relevant Figures to know | By Dr. Emmanuel Eni Amadi (DEEA).

PROPERTY INVESTMENT CORNER

The Covid-19 pandemic has led to a mini-boom in the property market in England and Scotland. In addition to the demand for residential properties, investors are also looking into buy-to-let properties as a way to begin or expand their investment portfolios. It is vital to possess a good understanding of the financial terms used in the Property Market, and that’s what this page aims to provide you with.

Every business is designed to generate revenue - even charity organizations, the Boss needs to know where the next revenue or funding is coming from to tackle inherent expenditures that keep the company running without clogging the wheel of progress.

It is essential to comprehend the YIELDS your rental property will generate to provide you with your desired income if you are considering property as an investment. You would anticipate that capital growth and rental yield will provide you with a substantial return on your investment (ROI) over time.

Before buying or investing in any property, it is vital that you undertake the following due diligence processes by doing some mathematical calculations. You don’t have to be savvy in Maths, but at least you must be able to punch your figures, not with your head, but with a calculator like a real Property Investor!

Rental Yield

In simple terms, a property's rental yield is the return you receive on a property you own or are considering purchasing. This is used to determine the property investment's value. You would take the property's purchase price or its current market value, and the anticipated annual rental income to determine rental yield.

To calculate a percentage, divide the annual rental income by the property's value or purchase price and multiply by 100. Your rental yield is this much.

EXAMPLE:

You bought a new property for £250,000, and the annual rental income is £13,000. Therefore, Rental Yield = (£13,000 ÷£250,000) x 100 = 5.2%. Therefore, your rental Yield is 5.2%.

Gross Rental Yield vs. Net Rental Yield

As calculated above, the Gross yield is the rental income divided by the property's value expressed as a percentage. Understanding the Gross yield gives you a general idea of whether such property is a good investment – allowing you to quickly compare various properties even before making the first phone call enquiry, let alone booking an appointment with the agency or landlord. Unfortunately, this is just a bird’s eye view and does not put into consideration, “other costs” incurred after the purchase. That’s where you need the NET RENTAL YIELD.

Therefore, to calculate the Net Rental Yield, all expenses such as mortgage payments, property management fees, upkeep, insurance, agent fees, Energy Performance Certificate, Gas Safety Requirements, Legionella Risk Assessment, cost of Referencing, an allowance for repairs, allowance for voids (when the property becomes empty), service charge and ground rent must be taken into account.

Example:

From the same example as above: You bought a new property for £250,000, and the annual rental income is £13,000. Let’s say you spent £6,000 to refurbish the property. Therefore, the final bill or cost incurred purchasing the property will be £250,000 + £6,000  = £256,000.

The Net Rental Yield = [Revenue (£13,000)  ÷ Cost of Purchase (£256,000)] x 100 = 5.1%. Therefore, your Net Rental Yield is 5.1%. Alternatively, you can calculate this easily by clicking the following website from LandlordVision.

Return on Investment (ROI)

The ROI is the Annual Profit (i.e., income minus costs) created by your Asset, and the result is divided by the Physical Cash you’ve invested in. In some investment journals, you might come across the ROI being referred to as the Return on Cash (ROC) or Return on Capital Employed (ROCE). All of this jargon – ROI, ROC, and ROCE - mean the same thing.

From the same example as above: You bought a new property for £250,000 with a 25% deposit (£62,500) loan to value (LTV). The mortgage used is 75% LTV = £187,500. The annual rental income is £13,000. Let’s say you’ve spent £6,000 to refurbish the property to your standard and spent £8,500 annually on the property (including landlords insurance, Repairs and maintenance, Ground rent and service charges, letting agency fees, utility bills payable by the landlord, Council tax (if payable by the landlord, but normally paid by the tenant), Vacancy loss, and other property costs). How much is the ROI?

Calculation:

Annual Rent = £13,000

Annual Costs: £8,500

Annual Profit = £4,500

Purchase price = £250,000

Mortgage used (75%) = £187,000

Total Cash invested = (25% deposit + expenses) = £62,500 + £6,000 = £68,500

Therefore, ROI = (Annual Profit ÷ Cash Invested) x 100% = (£8,500 ÷68,500) x 100 = 12.41%

You can see how the ROI is over 2x substantially higher than the Gross Yield and Net Yield. I prefer the ROI as it gives me the exact picture of the actual cash invested and the true costs of running the property annually.

Regional Yields

According to recent Zoopla data, Scotland has the highest rental yield of any region in the United Kingdom, at 6%, with Glasgow having the highest yield, at 8%. When determining where to purchase a property, it is essential to take into account regional variations in property prices and average rents.

Capital Growth

The term "capital growth," which can also be referred to as "capital appreciation," refers to the degree to which the value of your individual property or portfolio of properties changes over time.

For instance, if you bought a property five years ago for £200,000 and it is now worth £250,000, your capital growth is £50,000.

Property prices can be influenced by a variety of factors in any given location. Keep up with what's going on in the area where you want to invest because, in addition to supply and demand, any plans for redevelopment, transportation, amenities, or new housing can have a positive or negative effect on house prices.

To learn more about Capital Growth,  and rental yield, consult the team at Amadi Global Properties LTD staff.

Written by:

Dr Emmanuel Eni Amadi, MBA, PhD

Founder and CEO,

Amadi Global Group of Companies