Property investment is dominated by numbers and calculations and in order to establish whether an investment is worth your while the numbers must stack up. To achieve true financial freedom, you must perform the necessary calculations and ensure you always end up with a positive figure. This apply whether you’re an established property investor with a diverse range of investments under your belt, or a novice venturing into the world of property investment for the first time, in order. Calculations are key to discovering how profitable and lucrative an investment and are helpful when evaluating the performance of an investment property in any housing market. Here is a list of calculations which will help you at every stage of your property investment journey.
Return on Investment (ROI)
Return on investment is pretty self-explanatory and does exactly what it says. It is a way of working out how much you have made when you compare your returns to the investment value you started with. In property, the calculation is the annual profit minus any costs you have incurred divided by how much cash you initially put into the investment. Here is a monetary example:
Annual rent of a property = £10,000
Annual Costs = £4,000
Profit = £6,000
Purchase price = £150,000
Mortgage used = £50,000
Cash invested = £100,000
£6000 ÷ £100,000 = 0.06, so return on investment 6%
Stamp duty refers to a compulsory land tax that applies to properties purchased in England and Northern Ireland, although numerous factors dictate how much stamp duty you owe. In UK property, stamp duty can be the determining factor behind whether you wish to purchase a property or not, due to increasing the overall purchase price. You will only be expected to pay stamp duty when the property price is above £125,000. The general rule of thumb is the higher the property price, the more you will be expected to pay.
Certain types of properties are exempt from this land tax, such as student properties. However, it is definitely worth taking a thorough look into stamp duty charges and working out how much you would be expected to pay if you either invested in property or bought a second home. To accurately calculate the stamp duty on your property, property investment specialists RW Invest have devised a stamp duty calculator to help you figure out the amount you would be expected to pay on your property. Using an experienced company to work out your stamp duty amount is a reliable way to calculate what you owe, whether you wish to work out the stamp duty amount for a second property or a buy to let investment.
Capital appreciation, also known as capital growth, is the value in which a property grows over time from the price of purchase right up to the sale price. This figure can help you to figure out when the best time to sell is, as well as how much potential a property has in securing high levels of profit in the future. To work out capital appreciation, you need to compare the price you paid for the property with the average growth rate in the property’s area; this can be found online. For example, in January 2019 the average UK house price growth was 3.1%, but in Liverpool it was 5.1%, whilst in Manchester house price growth was even higher at 5.6%. Using these statistics, future predictions can be made to estimate the capital appreciation potential across these areas.
Gross Rental Yields
Calculating the gross rental yield will give you a clear indication as to whether your investment will be profitable, as well as acting as an aid when comparing properties against each other. Calculating your gross rental yield is straight forward and it refers to the annual income generated divided by its price.
Annual rent: £9,000
Purchase Price: £150,000
Gross yield: 6%.
However, this calculation does not take into account additional costs and is used mainly as a quick and easy way to compare properties against each other. If you would like a more accurate figure as to how much rental income you should expect to receive, then it would be worth performing the calculation for net rental yields. This can be expressed as the annual profit (income minus costs) generated from your property, divided by its purchase price.
Annual Rent: £9,000
Annual Costs: £2,000
Annual Profit: £7,000
Purchase Price: £150,000
Net yield = £7,000 ÷ £150,000 = 5%
Keeping track of the numbers involved in a property purchasing is an essential skill for property investors. Working out these figures will help to gauge how worthwhile your investment will be and will help you make the right decisions.