Investing in property has always been one of the most lucrative and safe investments people can make. With many benefits such as a monthly cash flow and tax advantages, it also allows you to increase your wealth, enabling you to save for retirement or other events. Despite the seemingly endless technical jargon and paperwork that can be involved, investing in property can be done by just about anyone.
The most difficult part of getting started in property investment is choosing your first property, and making sure it pays off for you. Let’s look at some of the basics and how to work out your ROI.
What type of property should you invest in?
Potential rental properties can include anything from simple studio apartments to larger 3 and 4 bedroom family homes and more. The main benefit being a monthly cash flow from rent payments. Remember whatever the property that you are always in control and can issue a short-term or long-term rental, both of which have different pros and cons depending on your goals.
What property you choose for your first investment would depend largely on your budget. While it may seem like the bigger the property, the bigger the return. While this may be true in some cases, it isn’t guaranteed and in fact, a shrewd investor would find a smaller property in the right location, and in the right condition, to make a bigger return.
Other factors to include are whether you choose to invest in a new property or purchase a home in need of repair or Refurbishment as it’s called in the industry. The right fixer-upper can turn a tidy profit and can be a great way of finding your feet in the market without having to go all-in on something brand new.
Calculate your ROI
Return On Investment (ROI) measures the profitability of an investment. Here are the basics of what you’ll need to calculate your ROI for your new property:
Details, details, details:
All property details available to you including property value, mortgage details, rental income, monthly expenses including any maintenance and annual expenses like property taxes.
Once you have all of the information you need, you can begin to work out just how much you could potentially yield on your investment. Below are some examples of what you can now begin to work out.
• Net Operating Income (NOI): The net operating income or NOI, which represents how profitable your investment will be, can be calculated by subtracting the gross income minus your operating expenses.
• Cap Rate: This is also known as the capitalization rate and represents the rate of your return. It can be calculated by dividing your NOI by the price of the property.
• Cash-On-Cash Return: The return that is expected from your investment. Divide the after-tax annual cash flow by what you paid to purchase the property.
• Annual Gross Rent Multiplier (GRM): This helps measure the value of the rental investment. It can help you see if the asking price is reasonable. To calculate this you need to divide the total sales price by the annual gross rental income.
• Annual Cash Flow: This is calculated by the net operating income minus any debt. This is how much you will profit (or lose) from your rental annually after all expenses and mortgage repayments are covered.
A strong ROI for a rental property is usually above 10%, but 5% to 10% is also a perfectly acceptable range. Different investors will take different levels of risk, which is why knowing your budget and analyzing the potential return is crucial to success.
As usual, if there is anything at all KPM Group can help you with on your investment journey, please don’t hesitate to get in touch today and a member of staff will be happy to help in any way we can.
