What's the return on your investment property?
A lot of our Rebel Finance School attendees ask if it's a good idea to invest in property. Or they want to be really clear on what return on investment or return on equity they're getting. This can be tough to figure out so we build this neat little calculator to help you do it. You can use this calculator to analyse an investment you already own OR you can use it to assess a potential investment.
Investments decisions should be made on maths and logic not emotion.
Enjoy using the calculator and then keep scrolling down for some final thoughts
Investments decisions should be made on maths and logic not emotion.
Enjoy using the calculator and then keep scrolling down for some final thoughts
Property is a business
Investing in property can give you a good return. If you're thinking of buying a property to rent out, make sure you do the numbers to work out the estimated return. I say "estimated" here because we can guess what the costs are going to be with the property but we don't know exactly what will happen or what unexpected costs will come up. You're renting to people and people do unpredictable things sometimes!
When most people work out the return they assume they are going to be able to rent out the property 100% of the time. This may or may not happen. We have owned and rented out three different properties. One of them has always had a tenant in it. The second one has always had a tenant in it BUT they stopped paying rent for a few months during the pandemic. And the third one was empty for 5 months whilst we struggled to find a tenant. This is why we've included the void assumption in our calculator; to allow for the fact that the property will probably be empty at some point whilst you own it.
Make no mistake, owning property is a business. Even if you hire a property manager or lettings agent you are still ultimately responsible for the property and looking after your tenants so there is still work involved. We used to own properties and we're currently working to sell them all. At this stage in our lives we'd rather be passive in our investments and active in our lives. This is why we invest in low cost index funds, so we can spend our lives having fun and prancing about on the beach rather than managing our investments.
When most people work out the return they assume they are going to be able to rent out the property 100% of the time. This may or may not happen. We have owned and rented out three different properties. One of them has always had a tenant in it. The second one has always had a tenant in it BUT they stopped paying rent for a few months during the pandemic. And the third one was empty for 5 months whilst we struggled to find a tenant. This is why we've included the void assumption in our calculator; to allow for the fact that the property will probably be empty at some point whilst you own it.
Make no mistake, owning property is a business. Even if you hire a property manager or lettings agent you are still ultimately responsible for the property and looking after your tenants so there is still work involved. We used to own properties and we're currently working to sell them all. At this stage in our lives we'd rather be passive in our investments and active in our lives. This is why we invest in low cost index funds, so we can spend our lives having fun and prancing about on the beach rather than managing our investments.
Return on Equity
The reason return on equity is important after you have had the property for a while is because that equity could be doing something else for you if you didn't have the property. You might have only made a £25,000 investment in terms of the deposit but after 5 years invested you might have £125,000 equity in the property.
When you are considering your return it is critical to work out the return on equity. This is because that equity that has been building up could be working for you somewhere else if you sold the place and invested it in a different way. You might be getting a fabulous ROI but an appalling ROE; which is the position we are in at the moment.
Our ROE is only 4% on our properties and we would get a far better return in a low cost index fund instead and have less work to do.
When you are considering your return it is critical to work out the return on equity. This is because that equity that has been building up could be working for you somewhere else if you sold the place and invested it in a different way. You might be getting a fabulous ROI but an appalling ROE; which is the position we are in at the moment.
Our ROE is only 4% on our properties and we would get a far better return in a low cost index fund instead and have less work to do.
Feedback please
Please please please let us know what you think of the calculator. Are there bits that don't make sense or you don't understand? Are there ways you think we could improve it. Please tell us!
Disclaimer
This is not financial advice. We are not financial advisors! We are just sharing our opinions and what has worked for us in the past. Please read the full disclaimer here.
