Investment property return on investment calculator

This investment property return on investment calculator crunches the numbers so that you don’t have to.

Use it to work out the ROI on a property you own or one that you are thinking about buying.

(See the guide below if you have any problems)

ROI calculator for investment property

How to use our ROI calculator

• Annual rent – how much you receive from your tenants before fees
• Annual costs – this is everything you have to pay for such as agent fees, service charge, ground rent, accountant, tax etc
• House value – this is the current value of the house (not what you paid)
• How much did you put into the deal – As a minimum this is going to be your deposit but most people also add in house buying fees (solicitors, agent, survey etc). If you wanted to be really thorough you could add in current capital gains and sales fees, but most people don’t do that! If you bought with cash, you’d include the full price you paid (rather than just a deposit).
• House price increase – If you have a good idea how much your property has increased (or will do) in a particular year, key it in here. If you don’t you could assume 4%. This is the long run average for UK house prices. If you want to be conservative you could put a lower number such as 2%. You can also leave this blank and ignore capital gains altogether if you like.

Once you’ve entered all the info you get three numbers:

• House price increase – how much your house has increased.
• ROI rent only – your ROI based on only your rental income after expenses (no capital gains included).
• ROI (rent + capital gains) – your ROI including both rental income profits and capital gains.

Yield vs ROI

Buy to let ROI is a much better metric than rental yield. And that applies to both gross yield and net yield.

You see, rental yield and net yield are great for comparison purposes. If you wanted to compare a couple of properties you were looking to buy rental yield can help.

But here’s the thing. Yield doesn’t cut the mustard for investment returns.

Essentially, both gross and net yield lack vital information we need to assess our investment. Let me explain.

Rental yield (or gross yield) is simply annual rent divided by house price.

It’s simple so people like it, but it has a major problem. It takes no account of costs. This means it’s possible for a property with a good rental yield to actually looses money.

Your investment returns could be in the negative and you wouldn’t know about it.

Net yield gets a bit closer to the mark because you knock off costs from your rent before dividing by house price. But it is still far from perfect. Quite simply, it’s totally blind to capital gains.

In other words, whilst net yield does look at profits, it doesn’t take account of any increase in house price.

Which is kind of annoying because for most property investors this is the secret sauce.

Rental income usually gets more or less swallowed up on outgoings, particularly mortgage interest.

This leaves capital gains as the main driver of investment returns in most buy to let properties.

Anybody serious about property investment has to include this.

Enter stage left investment property return on investment aka our Buy to let ROI.

Buy to let ROI

Return on investment (ROI) is the best estimation of investment returns.

Any stock market aficionados might be more familiar with Return on Cash (ROC) or Return on Capital Employed (ROCE). I’m thinking about Warren Buffett and leading UK fund manager Terry Smith here.

Both like to talk about this whenever they have a chance. ROC, ROCE and ROI are pretty much the same thing. They describe the annual profit divided by the money you put in to the deal.

That’s just to say Buy to Let ROI is your annual rental income, minus expenses, divided by all the cash you had to hand over to close the deal.

BTL ROI = Rent minus costs divided by your cash in the deal

This is usually your deposit and upfront fees, although if you paid cash, it would be the amount you paid in cash for the property plus fees.

What is a good rate of return on investment property?

Rental property is a great way to grow your wealth, but it isn’t perfect.

That’s because it requires work! I mean you actually have to do stuff and make decisions and whatnot!

Whilst you can outsource a lot of the day to day running of a property to others like letting agents, you can’t outsource everything.

For a start off, you’ve got to choose the company / people you outsource your tasks to. And even then, you’ll still have things to do. Unless you are very lucky, even fully managed properties are going to have a never ending conveyer belt of decisions for you to make.

There’s just no way around it. I personally know large portfolio landlord’s that outsource everything. They still complain about the incremental hassle every new addition to their portfolio adds.

There’s just no getting away from it.

So why am I telling you this?

Well, it’s because there’s a big alternative to property investment called shares and they offer a very compelling proposition too.

I’m talking about investing in an index fund or ETF.

Anybody with a brokerage account can put together a strong investment portfolio with index funds or ETFs.

Property and index funds are compared in a lot more detail here if you are interested, but here’s the key – we’d expect a fund of global shares to provide about 9% annually over the very long term pretty much hassle free.

These days you can pretty much set it and forget it and let your money grow for you in the background.

Which leads us nicely back to the question in hand: What is a good rate of return on investment property?

I’d be looking for at least 10%. Otherwise, you might as well just still all your money in an index fund. Similar returns, but a lot less hassle.