Property Investments: Underestimating return on capital (ROC)

The Big Smoke has a whopping 8.1 million inhabitants according to the 2011 census but while working on a project with a colleague in the City I was reminded what a small world we live in.  My colleague had recently purchased a property in the east end of London.  He described the property as a “proper” new build, 2-bed flat, garage parking, gym, concierge, all the turn-key bells and whistles, but the area is considered up-and-coming.  Lots of folks are buying these types of properties in London and more so now with the great London building spree.  As the discussion carried about his new purchase I found out he was actually raised in Bexhill and he asked about the property market down here.

We continued and I realised one of the biggest differences from buying in London, specifically the new developments, is that return on capital is absent for several years after the purchase.  Many buyers would have to sell the new build at a loss for some period after the initial purchase but from an investor point of view who may only be concerned about yield the property will perform well.  

Return on capital should not be overlooked as this is one of the core reasons to make any investment. Good property investments will provide a return on capital of at least 20% in 5 years time (this accounts for inflation and property revenue).  Yield is a number that a lot of people will debate but the industry average is around 5% to 6% from rental income.  Most investors like to see gross yield around 11% and in real terms after accounting for inflation the yield will land somewhere around 8% annually.  This annual return includes all expenses related to the mortgage, building insurance, and maintenance to the property.

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Posted 293 weeks ago

Bexhill Property Memoirs

Bexhill-to-Let Welcome to our property blog! We are actively involved the property market in Bexhill and the surrounding areas! Our blog will have content about properties in the area, managing properties and tenants, working with estate agents, tips and tricks, bits and bobs, and perhaps some silly meaningless information too!

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