Property investment has always been a favourable way of making money. In order to invest in the right property and establish whether a return can be made it’s essential to know how to calculate risk and return on investment.
If you wish to invest in a buy to let property worth £90,000 and you take out a mortgage with a £18,000 deposit this means the lender has loaned you 80% of the value and you have placed a 20% deposit on your chosen property. If after a year your property goes up in value to £100,000 this means you have made £10,000, this equates to an 11% increase in value, which is already a 56% return on your investment of £18,000. This is one of the basic methods investors use to calculate the return on investment from a property purchase based on its market value.
To calculate the percentage of your deposit simply divide your deposit amount in this case £18,000 by the value of the property which is £90,000 and then multiply by 100. This should provide you with the percentage of your deposit against the value of the property in this case the answer is 20%. By working out the percentage value of your deposit you can identify mortgage rates that you may be eligible for.
If you have bought a property and want to find out how much it has gone up in value all you have to do is minus the purchase price which is £90,000 in this case from the current value of the property which for the purpose of this example we have put at £100,000. This means the property has increased in value by £10,000. In order to work out the percentage increase you simply divide £10,000 by the original purchase price which is again £90,000 and multiply by 100. This should leave you with the answer which in this case is 11%. It’s important to calculate your return so you can establish how much money you have made and also how fast the property is rising in value.
Now to calculate the return on your original investment based on your deposit which is £18,000 in our example. All have to do is divide the amount the property went up in value, which is £10,000 by the deposit amount and multiply by 100. This will provide you with the percentage return on your deposit which is 55% in our example.
Before you purchase a buy to let property it’s important to be able to determine the expected return on your investment. This is a relatively simple process and should help you identify whether if on paper a property is a viable investment opportunity.
To calculate the percentage annual gross rental yield you basically take the gross rental yield which for example is £6,000 and divide it by the property value which is £90,000 and then multiply by 100. The answer in this case is 6.6%. However, this does not include maintenance and all other deductions. But this will help you find give you a rough idea of the gross percentage rental yield.
If you want to calculate net rental yield you minus your annual rental yield from the total running cost and divide by the property value you then multiply by 100. So for example the calculation would look like this. Annual rental income is £6,000 minus total running costs we will call it £1,000 in this case and then divide by the property price, which is £90,000 and then multiply by 100. The answer in this case would be 5.5%. It’s essential that you take into consideration all potential costs when purchasing a buy to let property. The net rental yield formula is an essential part of the decision making process when you are investing in property. If your costs are higher than your rental income this could put you under unnecessary financial strain.
By using the above methods of calculating the return on investment you will be able evaluate the risk and establish whether a property is worth investing in.
