This article follows on from % Yield – What Is This? How Does It Work? It should be said that ROI (Return on Investment) and yield are quite different.
Before making any investment, you will consider how it will perform. So, you’ll do the same for your buy-to-let. You’ll look at how much rent it will generate, how much it will cost to buy and how much your asset will appreciate by (capital growth).
Yield & ROI
In the world of property, yield considers the total price of the property as the outlay. It then compares that to the amount of income it will generate…..giving you a % yield. Note – yield does not take capital growth into account.
On the other hand, ROI only considers the exact sum of money you invested and it does take capital growth into account. That’s why ROI is sometimes referred to as ‘Total Return’.
Here is a rough guide for working out a % ROI over one year;
Step 1 –Calculate the annual net rental income (see article on Yield for more info)
Step 2– Calculate the annual capital growth
Step 3– Add rental income to capital growth to get a total net income
Step 4 – Calculate exactly your total net investment
Step 5 – Divide your total net income by your total net investment
Let’s use the same example in our article on yield;
Add the annual net rent of £3,020 to an estimated 3% capital growth of £4,650 to give a total net income of £7,670. The total net investment is£55,000. Divide £7,670 by £55,000 to give you a %ROI of 14%.
Using this method will give you a clear way of calculating how your investment will perform and will enable you to correctly compare a property investment to pensions, stocks, etc.
Choosing Your Investment
% yield is the most common measure. It’s a great starting point and for many people it’s all they are interested in. In the cold light of day, you will need you investment to return a yield through rental income, and often the capital growth is viewed as a bonus.
The yield figures you see on Portolio are a superb guide and a strong yield will usually lead to a strong ROI. I suggest you look at your investment from a couple of angles. They say to leave emotion out of it....and they are probably right.
To summarise, investing in property is unique. The fact you can leverage your money must be considered. The total cost of the property is not always what you paid for it, and the capital returns could be far in excess of the funds invested.
Please drop me an email to firstname.lastname@example.org if you have any questions.