The Basics of Property Investment
Have you been thinking of investing in property but don’t know your rental yield from your capital growth? Here, we take a look at the basics of property investment. We will help you with the concept of a strategy to meet your needs and look at some of the variables.
Each person who invests in property has different ideas of what they want to achieve from their investment. It is important before you begin that you are clear what you are trying to achieve.
If you rely on the income from your investment to live you need a high return on investment. If you want the property to be your pension you won’t need the same return but would like to see some capital growth. It is important to bear in mind the liquidity of your money and how easily the investment will sell.
Return on Investment/Rental yield
You will often read about return on investment or yield in relation to investments. What does this mean for property investment? In order to calculate the gross return on investment or rental yield (Y) you will need to know two figures:
- The annual rent for the property (R)
- The total invested to purchase the property and have it ready to rent (I)
You can then calculate the rental yield by using the following formula:
Y = R/I x 100
This gross return on investment will give you an idea of how well your money is performing for you. You can compare it with your other investments to see if it is performing to meet your strategy.
When you purchase an investment property you want it to increase in value over time. This is commonly referred to as capital growth; the capital invested in the property is growing for you.
Historically, most property has increased in value over time if you wait long enough. If you are investing in property to act as a pension for you capital growth is likely to be more important than yield.
There are things you can look for to ensure capital growth:
- Buy for investment in areas where it is difficult to build new property. Conservation areas or cities surrounded by green belt see less development than more modern cities.
- Buy in locations with high demand. Property close to universities, hospitals and transport links will always hold their value well as many people want to live there.
- If you can buy near a new rail station or hospital you may see some rapid capital growth as demand spikes quickly.
On the whole, it is quite difficult to get to your money when it is invested in property. In this instance your money is often referred to as being “illiquid”. Liquidity means the ease with which you can access your money.
If you have an emergency and need to access your funds it will be difficult as you will have to sell the property. The sale process can take a long time and it can sometimes fall through unexpectedly.
If you think about capital growth and yield it will hopefully mean that your property appeals to the market and will sell easily. But it is worth bearing in mind that smaller properties will appeal to more of the market and leave your cash more liquid.
Investing in property can be complicated. However, if you stick to the basics you shouldn’t go too far wrong.
To summarise, you should come up with a strategy that suits you and your objectives. Once you have your strategy in place it will be easier to find the right property. Take into account the return on your investment, the level of capital growth and the liquidity of your money you would like to achieve.
If you are struggling to get to terms with your property investment then get in touch for a free consultation at email@example.com
If you have just bought an investment property or already have a portfolio but aren’t happy with your agent read some of our tips about how to find the right letting agent for you.