Understanding Property Returns

Want to learn more about the returns you can potenitally make from a buy to let investment? We have put together a short guide on yields and capital growth.

Rental Yields

Rental yield is the term used to describe the return on a property investment from a rental perspective.

If the monthly rent is £2,000 and the property is occupied for a full year, you will receive £24,000 per annum. If this sum is greater than the cost of owning, managing and maintaining the property, then you will make a profit that will be subject to income tax.

When investors compare rental properties, they will calculate the rental yields to see which is the most lucrative.

You can do this in two ways:

1) Divide annual rent by the value of the property, and then multiply the result by 100 to get a percentage return on investment.

In this example calculation, the costs of managing a rental property have been ignored, as these will differ depending on the size of the mortgage, the condition of the property and whether a letting agent is used. If the property in the above example cost £500,000 to buy, the following calculation would be used to determine the rental yield, which in this example is 4.8%:

24,000 / 500,000 = 0.048

0.048 x 100 = 4.8

2) Click here to use our handy rental yield calculator

If the property is more expensive to buy, but the rent is the same, the return on investment would be lower. Conversely, if the property were cheaper to buy, but the rent was the same, the return would be greater.

We can put you in touch with a mortgage adviser, who will be able to help you out regarding financing your property.

Capital growth

Capital growth is the value by which the property goes up over time. Although this hasn’t happened in a long time the value of a property can also depreciate.

To work out capital growth you will need to compare the price you paid for the property with a current market valuation, which we can help you out with or any estate agent will be able to help you with. This can be added to the return on the rental income for a total return.

Therefore if we take the same property from the example above and say it has increased in value from today’s price of £200,000 to a price in five years’ time of £225,000, the following calculation would be used to show the return in investment.

Price five years from now (£225,000) – Purchase price (£200,000) = £25,000

Increase (£25,000) / Purchase price (£200,000) = 0.125

0.125 x 100 = 12.5%

In the long term, property prices tend to go up, but in the short to mid-term, they also can go down. However there is a lot of uncertainty in the economy at present which makes predicting what the property’s price will be in the future harder to calculate. It is worth mentioning that calculating capital growth is pure speculation, and you can only accurately work out capital growth after the event.

When it comes to selling the rental property, you may need to take into account paying capital gains tax on the profit.

Property as an investment

The rental yield and capital growth calculations can help investors compare properties. They can also help investors compare property investments with other investments, such as ISAs, stocks and shares.

A downside to property investment is that if the money invested in a property to be liquidated, the property must be sold. This can take longer than it takes to withdraw money from other investments.

However unlike many other investments, you can sometimes influence capital growth as property improvements can increase a property’s value.

We hope that this helps you gain an understanding on whether the investment in property is for rental income, capital growth or both will help investors decide where to put their money. Both property value and rental value fluctuate.

If your property is mortgaged it may be repossessed if you do not keep up repayments to your mortgage.