What is a good return on investment for property?

When it comes to using this formula to work out your rental property’s ROI, all you need to do is individually calculate your annual gain on investment (your rental income), your annual cost of investment (any monthly outgoings over the year), and your initial cost of investment (the price of the property, alongside any additional one-off payments). Once you have these figures, all you need to do is take your total profit for the year (your annual gain on investment minus your annual cost of investment) and divide it by the initial cost of your investment.

To help you replicate this equation on your own, we’ve included a breakdown of the costs that could come into play in each section. Some of these may seem minor, but the more granular you can be when calculating your individual costs, the more accurate your ROI figure will be.

Annual gain on investment:

• The value of the monthly rental income, multiplied by 12 to get the value for the year.

Annual cost of investment:

• The cost of any monthly payments relating to the property that are not covered by the renters fee, such as insurance costs and bills if they are offered as inclusive.
• The sum amount of taxes paid on income earned from the property.
• The management fees paid to any additional entity that cares for the property, this is particularly common for landlords with large and geographically wide-spread buy-to-let portfolios.

Initial cost of investment:

• The cost of the property (it is worth keeping in mind that this figure is affected by whether or not the initial purchase was made in cash or with mortgage financing, we’ll go into how this changes the calculation in our working examples).
• The costs associated with purchasing a property, including solicitors fees.
• The cost of any one-off improvements or furnishings needed for the property, which could range anywhere from fitting a new boiler to supplying ‘white goods’ essentials.

Buy-to-let ROI calculation examples

As mentioned, whether you pay for your property in cash or by taking out a mortgage will also factor into your rental property’s ROI. To walk you through how this affects the calculation, we’ve included two examples below. The figures used are illustrative only, and are not reflective of market averages or any real-life case.

Example 1 – Cash-bought rental property

• The monthly rental income on your property is £800 
• Monthly expenditures (insurance, taxes and bills) came to £160
• The initial cost of your property was £100,000
• When first purchasing the property, legal fees came to £2000
• Before renting the property out, repairs to the property came to £3000

By inserting our figures into the ROI formula, we come to the following equation:

This means that the ROI for this buy-to-let property would be 7.3%.

Example 2 – Mortgaged rental property

The primary difference between a ROI calculation where the initial property purchase was made in cash compared to a purchase financed by a mortgage loan is that, rather than all being considered within the ‘Initial cost of investment’ part of the formula, the mortgage repayments are included in the ‘Annual cost of investment’ section, while only the cash deposit paid at purchase is included in the ‘Initial cost of investment’. Taking the same figures, and operating at a 20% deposit, and a 25 year mortgage with a fixed 5% interest rate, we get the following equations.

• The monthly rental income on your property is £800 
• Monthly expenditures (insurance, taxes and bills) came to £160
• Monthly mortgage repayments came to £467.67
• The initial cost of your property was a deposit of £20,000
• When first purchasing the property, legal fees came to £2000
• Before renting the property out, repairs to the property came to £3000

By inserting our figures into the ROI formula, we come to the following equation:

This means that the ROI for this buy-to-let property would be 8.3%.

What is a good ROI for rental property?

While what is widely considered to be a good ROI for a buy-to-let property changes with average property value and rental income fluctuations, the general rule of thumb to follow is that ROIs between 5 – 7% are strong. This changes when considering areas where the average property price is particularly high, such as London and Edinburgh, with a more accurate goal in London being between 2 – 3%. 

If you’re considering a property in a specific location, and would like to know what the average ROI would be for that investment, read our blog ‘What is a good rental yield in the UK?’ which breaks these down by average property price, average rental income, and average yield. 

How to calculate return on an investment property

While those looking to make annual returns on a property may look towards investing in buy-to-let lots, another popular method of property investment is to buy, renovate and sell. The calculation behind working out the ROI for a property investment of this type is slightly different to that of a rental property as there are no annual incomings or outgoings. Instead, this venture relies on a singular end transaction from which all profits are calculated. 

The formula for this calculation is as follows:

The most important figures to have to hand when calculating ROI on a renovation property are the original cost of the lot and the estimated cost of upgrades. Once these figures are combined you’ll have a clear view of the initial investment costs. Next, you’ll need to follow this up with an estimation of what the value of the property will be when reselling. To help you pull these figures together, we’ve laid out the main costs to consider below, as well as some advice on how to work out the estimated property value.

Initial cost of investment:

• The cost of the property.
• The costs associated with purchasing a property, including solicitors fees.
• The estimated cost of any renovations made to the property to increase its resale value. If you aren’t sure what improvements you’ll look to make on an investment property, we recommend reading our How to increase the value of a property blog, which details the best renovations and improvements to make, alongside their average costs.

It is worth noting that these figures don’t take into account additional elements such as taxes or insurance fees. To get a more accurate view of the potential ROI of your property, these will need to be considered separately, as these fees can change from project to project.

Estimated value of the property:

• The average market value of the property in its renovated state.
• The costs associated with selling a property, including solicitors fees.

As average market value will change depending on the location of the property, its size and amenities, as well as the general state of house prices, calculating even a rough estimate can be a challenge. One of the easiest ways to do so, however, is to make the most of recent house price data. Alternatively, the experienced auctioneers at SDL Property Auctions are on-hand to provide you with a Free Sales Valuation. 

Example – Renovate and Re-sell

• The initial cost of your property was £60,000
• When first purchasing the property, legal fees came to £2,000
• The complete cost of renovations made to the property came to £15,000
• The average market value of your property in its renovated state is £90,000
• The legal fees associated with selling your property will be £2,000

By inserting our figures into the ROI formula, we come to the following equation:

This means that the ROI for this property would be 14.3%.

What is a good return on property investment?

A venture which typically calls for a larger upfront investment than many buy-to-let properties, especially in cases where the lot is in a state of disrepair, ensuring you can make a good ROI on your chosen property is essential. Fortunately, for those willing to take on this type of investment, the potential to generate significant profits when the resale process is completed is huge. 

As the above calculation is so heavily influenced by factors such as the property’s location and size, as well as the budget you have to make value-adding renovations, it’s exceptionally difficult to make a judgement on what a ‘good’ ROI is for a renovated property. Even so, it would be fair to say that you should be aiming for roughly the same output as a buy-to-let property (5 – 7%) with a view to generate even more on the right lot. 

Whether you’re a developer or an individual considering selling your home, if you’re looking to make a considerable profit, our advice would be to pay attention to the biggest contributing factor of ROI: the initial cost of the property.  By keeping initial costs at a minimum you’re increasing your profit potential further down the line. The best way to do that is to buy below the market value by purchasing by auction.

Find a property worth investing in at SDL Property Auctions

While securing a good ROI is largely a case of comparing properties and making informed estimations on potential profits, one thing individuals can do to increase their chances of finding a good investment is to focus their search on auction properties. 

Known for the exceptionally wide range of properties available, auctions often provide the opportunity to secure a lot for under its market value. This low initial cost gives investors the best chance possible to achieve a good ROI.
If you’re looking to find a property at a good price, head over to our Property Finder to browse through the lots we have on offer.