Understanding and Calculating Your Return On Investment
Return On Investment
The One True Measure of Success
As an investor, the Return On Investment (ROI) our investment properties provide is, probably, the most important thing we need to know. After all, the return we get from our properties is the main reason we chose to become a property investor in the first place.
It's good practice to review your ROI, regularly, because the rent we receive and the costs we have will change over time and we need to make sure that our properties are generating the return we're looking for.
As with many things, there's a straight forward formula that you can use (once you know it), which we'll go through in a moment. However, for simplicity, we've created an online calculator that does the work for you, whenever you need it (see the form on the right).
Just bookmark this page and you can come back at any time! (You may want to do the same with our Rental Yield Calculator)
Of course, it's good to understand how these figures are calculated and what's included, so, here's the information you need;
Annual Rental Income (ARI)
This is pretty straight forward. Your Annual Rental Income (ARI) is your gross Monthly Rent (MR) multiplied by 12 (the number of months in a year): MR (£) x 12 = ARI (£)
Annual Costs (AC)
This is the sum total of all annual costs that pertain to this particular property. It will include things like your landlords insurance premium,your monthly property management fees (if you use a lettings agent), Gas Safety Certificate, Tenant Find Fees etc.
The Purchase Price of the Property (PP)
This one's pretty straight forward.
Legal Fees & Stamp Duty (LC)
This includes your solicitor's Conveyancing Fees, any Survey Fees and Stamp Duty, as well as other costs associated with the purchase of the property.
Refurbishment & All Other Costs (RC)
This is the sum total of everything that you've spent on the property to bring it up to a standard that will enable you to maximise the rental income.
If you add all of the above into the ROI Calculator it'll work out the following for you;
Annual Net Profit (ANP)
This is your Annual Rental Income (ARI) less your Annual Costs (AC): ARI (£) - AC (£) = ANP (£)
Cash Left in the Deal (CiD)
This is the Purchase Price (PP) of the property plus the Refurbishment Costs (RC): PP (£) + RC (£) = CiD (£)
Return On Investment (ROI)
This is the Annual Net Profit (ANP) divided by the Cash Left in the Deal (CiD) multiplied by 100 and it gives you a percentage: ANP (£)/CiD (£) x 100 = ROI (%)