Return

Return on property investment

Returns are one of the key elements of property investment, which not only attract investors but also often present them with challenges. In this article, you will learn what returns mean, what types of returns there are, and how you can use them effectively for your property portfolio.

What is a return on investment?

Yield refers to the return generated by an investment in relation to the capital invested. In the property sector, yield is usually expressed as a percentage and plays a crucial role in the valuation of properties as investment assets.

Types of return

• Gross yield: This yield takes into account the total rental income relative to the purchase price of the property.
• Net yield: Unlike the gross yield, the net yield also takes into account running costs such as maintenance, management and service charges.
• Return on equity: This measure examines the relationship between the equity invested and the profit.

The formula for calculating the rate of return

Various formulas can be used to calculate the return. The most common formula for determining the return is:

Yield (%) = (rental income – running costs) / purchase price * 100

How do you calculate the return on investment for property?

It is important to calculate the return on investment accurately in order to make informed decisions. Here is a step-by-step guide:

1. Work out the annual rental income.
2. Subtract the running costs.
3. Divide the net rental income by the purchase price of the property.
4. Multiply the result by 100 to get the percentage.

Factors affecting the return on investment

There are various factors that can influence the return on investment, including:

• Location of the property
• Market trends
• Changes in legislation
• Economic conditions

Why is the return on investment important for investors?

The return on investment provides investors with information about a property’s profitability. It helps them to compare different properties and make an informed decision. A higher return on investment may indicate a better investment, particularly if the risks are reasonable.

A clear example of the topic: return on investment

Imagine an investor buys a small flat in an up-and-coming town for 150,000 euros. They generate annual rental income of 12,000 euros, but incur annual costs of 2,000 euros (maintenance, insurance, etc.).

The calculation of the return on investment would be as follows:

Rental income – running costs = 12,000 euros – 2,000 euros = 10,000 euros
Return = 10,000 euros / 150,000 euros * 100 = 6.67%

In this example, the net return is 6.67 per cent. The investor can now compare this return with other property sales and better assess the investments made.

Conclusion

The yield is an essential metric for investors in the property sector. A thorough analysis and calculation of the yield helps to identify profitable properties and make informed decisions. Remember that the yield is just one of the tools available to investors for planning and executing successful investments.