One thing we hear regularly from clients is that they find the terminology used in property investment to be a little bewildering at times.
Working in an industry of acronyms we can’t disagree with that assessment but as Property Investment Consultants it’s our job to simplify these terms and give clients absolute clarity on what they should be focusing on.
The first (and sometimes only) area to get au fait with is your profit terminology. With Yields, ROIs and Capital Gain to consider, what does each refer to and what is most important?
What’s most important to you can depend on what you want to achieve and when you want to achieve this by but a simple guide to Property Profit terminology can be seen below:
Quite a straight forward one to start with. Your Yield is the annual rent of your property divided by the value of the property. So, say you buy a property for £150,000 which rents for £850pm (£10,200 per annum):
Annual Rent / Value of Property = Yield
➡️£10,200 / £150,000 = 6.8%
The Capital of a property refers to its value so the gain refers to its growth. If you bought a property for £150,000, held it for 10 years and then sold it for £200,000 your capital gain would be £50,000. An important figure to know when forecasting and establishing your overall returns.
ROI is the Return on Investment and typically where we focus most of our energies. Simply, it’s what you get back for what you invested in the first place.
On that £150,000 example, say we buy with a 25% deposit / 75% mortgage then add all stamp duty, legal and professional fees. Your total initial outlay here would be £48,500.
Between annual rental income and capital gain, over ten years you will have earned just under £71,000 in profit over and above your initial outlay. This results in a total ROI of 146%. Quite a remarkable return for a fairly short period of time.
We run all three of the numbers above for every client as part of our detailed consultation process. Knowing your numbers from the outset allows you to invest with confidence and then track these numbers through the investment period.
If you would like some help understanding your investment numbers, get in touch.