March 14, 2023
How to Calculate ROI on Rental Property UK
If you’re looking to make an investment in property for the purpose of renting it out, you’ll naturally want to understand how to make a healthy profit.
Here we look at how to calculate ROI on rental property UK and what you can do to maximise your return.
What is ROI and how does it differ from rental yield?
Rental yield is a basic calculation that shows the cost of your initial investment against your expected rental income. The ratio easily allows landlords and agents to compare properties and gives a good indication on what gives a good return on a rental property.
Whilst this is useful, rental yield does not take into account void periods, management costs, repairs and management fees. In short, it does not consider any of your costs.
Return on Investment (ROI) is another measure of the profitability of your rental property, but it looks at the whole picture. In other words, your investment and your rental income, as well as your expenditure on the property.
How to calculate ROI on rental property UK
If you’re looking at how to calculate ROI on rental property UK, here’s the calculation to use:
Annual rental income minus all costs (including annual mortgage repayments, maintenance costs and management fees) = net profit.
Divide net profit by your initial investment and multiply by 100 to give a ROI percentage.
The ROI is a more useful figure because it depends upon the amount of money you are spending on things like refurbishments and decoration, etc.
How to maximise your ROI
As a landlord, or a property manager, once you have looked at how to calculate ROI on rental property UK, you will naturally want to look at ways to boost your return.
Here are some ideas:
Set a fair rental rate
Increasing the amount of rent you charge could easily increase rental yield and therefore your ROI. But this can be risky and could potentially lead to higher void rates. So be sure to take advice on what is a fair rental rate for your area and type of property before making any rash decisions.
Prevent void periods
Ensuring your property doesn’t sit empty for any length of time will undoubtedly boost your ROI because you won’t have to deal with months of non-payments.
As a landlord, there are several things you can do to speed up the amount of time it takes to rent out your property so that void periods are kept to a minimum.
By securing longer term lets, there’s less administration for incoming tenants, and less to spend on sourcing new tenants. Tenants are more likely to agree to longer term leases when they are happy with the property; when you respond quickly to repair issues; when the property is well maintained, and if you can be flexible to their needs.
Extend your property
If you can add another bedroom to your property, you can expect to receive a higher rental income and increase your rental yield. Whilst there is an initial cost in extending, the return on your investment could be worth it in the long run. Do check with a local property expert though to ensure there is demand for a larger property in your area.
Use a guaranteed rent scheme
Using a guaranteed rent scheme ensures landlords have a constant rental income, even if the property is vacant. With a guaranteed rent scheme, you will also continue to receive a regular income even if your tenants fall into arrears.
Rent guarantee schemes reduce costs in other ways too, such as covering property management and maintenance fees, covering the costs of regular inspections and taking care of sourcing tenants.
Maximise your ROI with a guaranteed rent scheme
Once you’ve understood how to calculate ROI on rental property UK, you will naturally want to maximise your return.
One way to do this is to minimise your expenditure. A guaranteed rental scheme such as the one offered by the team here at City Borough Housing removes the costs of void periods, management fees, legal fees and maintenance.
Our rent guarantee scheme is backed by an exclusive service promise and fully inclusive, fee-free property management, so you know that as well as receiving your rental income each month, your property is in the safest hands.
If you’d like to know more about the benefits of a guaranteed rent scheme and how it can give you as a landlord peace of mind, then do get in touch with our friendly team who will also provide you with your free, no-obligation rental valuation.