When trying to decide on which property investment to go for, it is critically important to fully understand how to run the numbers. There are several different ways to do it and people use different terminology. The following is the most straightforward way I have seen to assess deals.
Gross: Annual Rental Income / Purchase Price
E.g.: £750 pcm rental income x 12 months = £9,000. Purchaser price £150K. £9,000/ £150K = 6% Gross.
ROI (Return on Investment)
A lot of people seem to term this Net, but I prefer ROI. This number considers the net return on the amount of capital expended (Capex). So, let’s assume in the example above, you are buying with a 25% deposit.
Capex: 25% of 150K = £37,500. Add to this stamp duty, buying costs, let’s call it another £5K. Total Capex: £42,500.
Net Annual Rent: £4,800
So, £4,800 / £42,500 = 11.3% ROI
TROI (Total Return on Investment)
This is a way of including projected capital growth on the property. Let’s assume that the market has been increasing by 5% per year for the past 3 years, and we expect the same to continue. That would mean, after 1 year a £150K property would be worth £157,500. An increase of £7,500. So, TROI is (Net Annual Rent + Projected Capital Growth) / Capex.
or (£4,800 + £7,500) / £42,500 = 29% TROI