The formula you need is Total Return
What is Total Return?
Total return is a term you may have heard used with relation to property investment. What is it and how can you use it to help you invest in property?
Put simply total return is:
Rent Return + Capital Growth = Total Return.
Often investors focus on one or the other but really you should always consider your total return, especially if you are taking a long term view on property investment (which we always recommend).
Remember, the most important formula you should understand is Return on Investment (ROI) and by understanding how to calculate total return you will be able to assess your portfolio performance year on year.
So how do we calculate your total return?
First we need to establish what your rental return is. It’s important that we get a net return and we do this by taking your income from rental and then minus all the costs including management costs, mortgage costs and any other running costs.
We take that net figure and divide it by your purchase price which will give your net return.
Then we need to look at Capital Growth, there are a few indexes we can use to establish the capital growth but most commentators refer to the Land Registry. The Land Registry records the actual selling prices of all property transactions and from that they will release data relating to house prices.
So what would we have achieved if you bought a property a year ago for £100,000, your rental return is 5% and your capital growth is 5%?
Rental return £5000 + Capital Growth £5000 = Total Return £10,000 or 10%
Total return gives you an important indicator to how your portfolio is performing on an ongoing basis. If you already have a property portfolio you can use this formula now to bring more clarity to how it’s performing.
If you have any questions about this blog or any other then please contact us on 0207 148 3164 to speak with an asset manager or you can book a phone meeting at a time that suits you.
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