All property investors need to master this formula, fortunately you don’t need to be Einstein to use it.
The world of property investment is awash with formulae and yields, net, gross, etc. A basic understanding of them is useful but not imperative.
However there is one formula that supersedes all others. It will not only help you assess any property investment deal but it can help you measure up any investment. It’s already used by investors in every other sector but property investors have been slow on the uptake.
The formula that is key to property investment success is Return on Investment, sometimes referred to as ROI
What is Return on Investment?
Return on Investment is a measure to assess the effectiveness of an investment or to compare the effectiveness of several different investments. You can calculate ROI by adding up the return of an investment and dividing it by the cost of the investment
An Example of how this works in property investment:
First you need to establish the net return (return after all costs) on your property per year. So take the rent over 12 months and deduct all your running costs mortgage, management fees, etc
Then you need to work out what it cost you to purchase the property and let it – such as the deposit, solicitors fees, letting fees, etc.
For this example let’s say your net return each year is £3,000 and it cost you £50,000 to buy the property.
3,000 / 50,000 = 0.06 or as a percentage 6%
Much better than the banks and you own an asset!
How to use Return on Investment
You can now use this formula to assess one property deal against another and property ownership against other types of investment. This means you can cut through all the hype and marketing bull and assess returns with clarity.