If you really want to know what an average return on property investment in the UK is, you wouldn’t be alone. But would you be right to ask? Abandoning average hurts, but honestly, if you’re going to be a successful property investor, abandon it you must, because the answer really depends on you and what you want to achieve with your portfolio.
Let’s say you’ve got a property in your portfolio that you’ve had for a while. It’s increased in value, but the initial capital in it might be quite small, therefore the ROI on it looks quite inflated. How do you compare it like for like with other investments? And if you’ve taken a substantial proportion of the original investment out, can ROI lose its value?
There’s a couple of different ways to look at this - the best way for you, will depend on the purpose of doing this calculation in the first place.
1. Return on Capital Invested
If you have a property that you’ve owned for a long time, especially if you’ve refinanced and pulled money out of it, you could be in the situation where your ROI is ludicrously high or even infinite i.e., if you’ve pulled all the money out then you have zero investment and you’re making some kind of return, then theoretically your ROI would be infinite! On one level that’s useful to know, because it’s true, you really are running that level of return on your investment.
But just because it’s true doesn’t necessarily mean that it’s useful – you will feel good about it and it’s nice to have it on a spreadsheet, but what do you do with that information?
2. Gross yield
This is where you might actually prefer to come back to a simpler calculation like gross yield.
Because that is what a potential purchaser of your property would be looking at.
So, say you bought the property, and it had a yield of 8% and the property yield is now 4%. What that is probably telling you, is that the value of the property has increased - and that’s the return somebody who bought the property off you today would be making.
That might lead you to think “would I buy this property today?” The answer may well be “no, not at that level of return”. That might lead you to sell that property now because you believe it’s had most of the growth that it’s going to have then go and reinvest that money in an alternative property, or even an alternative assets class elsewhere - where you believe the return on it will be better.
Both are completely valid ways of looking at the situation. If you’ve got a property that’s gone up in value substantially and especially if you’ve pulled some money out, you really are getting a great return on it and that’s a good thing. That aside, there may be better things that you could achieve with your capital by selling that property and re-investing somewhere else and that’s what going back to a gross yield calculation would show you.
The answer depends on what you want to achieve with your portfolio. Are you in the kind of stage where you want to sweat your cash as hard as you possibly can, you’re in the mode of selling and re-buying to maximise your future return on investment, or are you just happy holding?
That’s a question that only you can answer, but if you’d like to run the financing of your portfolio through with one of our experts, but with no strings attached just reach out and let’s talk, we’d be happy to give you our thoughts.
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