The measure of the success of a buy-to-let investment will always be the figures, but is your return on investment the only figure you should care about?

Most landlords measure return on investment (ROI) as a percentage of the cash they have invested. Strictly speaking, this is the capital and rental income return on the money invested so far, including purchase costs, repairs, refurbishment, professional fees and mortgage repayments; but sometimes the term is used interchangeably with ‘yield’ (the annual rental income over the property value, gross or net of running costs).

Yet many landlords don’t consider their nominal returns. This is the amount of cash income that remains after running costs and debts are paid each month.

Landlords who aren’t interested in replacing some or all of their main income with rent might not be overly concerned with nominal returns – they simply wish to know that their asset is performing well, and their ROI percentage will tell them that. There is nothing wrong with this, but it is always worth bearing in mind that a 5% return on a property worth £200,000 and a 5% return on a property worth £50,000 are two very different things. Even if the cheaper property had double the yield – which is not outside the realms of possibility – it would still only return half the income.

Keeping a sense of proportion

No matter the value of your property or the amount of money you have put into it, your obligations as a landlord remain the same. Properties that earn hundreds of pounds per month require the same level of commitment and effort – and in some cases, expenditure – as those that earn thousands.

Some overheads will cost the same no matter the value of your property. Energy performance certificates (EPCs) and new boilers are prime examples; two things that might only cost a fraction of the returns from a prime property, but could eat through a month’s worth or more of the profits from a six-figure terrace in the midlands.

Certain other purchasing and remortgage costs remain static, too; many buy-to-let lenders charge fixed product fees, and even if they don’t, a number of other mortgage costs such as booking and transfer costs might still be fixed. Again, these will make up a much larger chunk of the profits from a cheap property than those of an expensive one.

Whether you choose to focus on percentages or cash figures will depend on your business approach and your goals for the future, but it can never hurt to mix the two; looking from as many angles as possible will give you the fullest picture of how your business is performing.

If you wish to calculate your property’s yield and/or the return on your investment so far, there are a number of free online calculators you can use; simply click on the Commercial Trust link below this post to try them out.

 

Written by Ben Gosling at commercialtrust.co.uk