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Yield and ROI

A buy-to let can produce capital growth and annual rental income. How is yield and ROI calculated.

There are two ways landlords make money through property letting:
Capital Growth = increase in a property’s value
It is worth remembering that house prices can appreciate but there is always the possibility of their value going down.
Rental Income = what is paid by the tenant
Hopefully your rental income with increase over time but there are costs to consider such as repairs and “voids” if the property is empty between tenancies.

How to calculate yield
Monthly rental income x 12 months = annual rental income.
Annual rental income divided by Property Value = Yield percentage.
E.g. Annual rental income = £6000 and the property cost £100,000
= £6,000 divided by £100,000 which equals 0.06 or 6%

Return on Investment
Purchase price is £100,000
Deposit required is 25% = £25,000
Property rents at £500pcm - £6000 per annum
Mortgage costs £3,750pa (interest only @5% on £75,000)
Income after paying mortgage is £2,250 per annum
ROI on £25,000 = 9%

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