Property investment is a popular strategy for individuals looking to build wealth and achieve financial security. But whether you are looking to invest in a new property for the first time or add to your existing portfolio, you will need to consider the potential returns and determine if the investment is worthwhile.
Want to learn how you can unlock your property’s portfolio to its fullest potential and secure the biggest returns? Keep reading to find out more.
A Guide To Property Investment Returns
Why Property Investment Returns Matter
Understanding property investment returns will enable you to build a strong portfolio and achieve your financial goals. It is also a key metric for evaluating not only the success of your investment strategy and navigating the property market effectively.
The return on property investment acts as a performance measure to gauge profitability, representing a percentage of the total investment. In stable markets with minimal price fluctuations, a good return on property investment is typically around 7%.
Calculating Your Return on Investment (ROI)
If you’re planning to purchase a buy-to-let property in the UK with hopes of earning a significant return on your investment, you need to understand the two key components that work in tandem to generate wealth: rental yield and capital appreciation. Let us give you a breakdown.
Rental Yields
This is the annual rental income you receive from a property, expressed as a percentage of its purchase price. Rental yields can provide a steady stream of income which can contribute to your living expenses, be reinvested into your portfolio, or used to pay any mortgage payments.
However, it’s not advisable to purchase a property based solely on an expected high rental yield. These decisions do not consider the cost of property maintenance, taxes, or insurance, all of which can significantly impact your net return on investment. For example, dealing with unsuitable tenants or facing difficulties when selling the property could diminish potential profits despite an initially high rental yield.
Capital Appreciation
This refers to the increase in your property’s market value over time. If the time came to sell your property, the profit you make from this appreciation would contribute significantly to your overall return. This metric is essential for investors looking to build long-term wealth.
While most buy-to-let investors benefit from both types of return, a balanced investment strategy will often incorporate both aspects. Having an understanding of both capital appreciation and rental yields will ultimately help drive a decision on where to invest and what type of property to purchase.
Average Property Returns in the UK
According to Zoopla, the current average return on property investment in the UK has a gross rental yield of 5.60%. This figure is based on the average buy-to-let property costing £261,897 and the UK’s average rent being £1,223. It should be noted that while house prices have begun to fall, rent has risen in the last year, contributing to an overall improvement in gross yields across all regions.
ROI can be influenced by a multitude of factors. Take London, for instance. Despite being a major city where rent prices are high, its current ROI sits at 4.95%. In comparison, in cities like Newcastle and Liverpool, where property prices are lower, the ROI is over 7%. Generally, a good rental yield is anything between 5 and 8% but you should try to aim for 7 and 8% for the best yield on property investment.
In the North of the UK, you will find property prices have a lower entry point, making them more attractive to investors, particularly to those who are just starting out. Moreover, many northern cities are experiencing economic growth and regeneration. This trend can lead to increased housing demand, potentially driving up rental prices and property value in the future. If you want to discover the best places to invest in property, check out our guide here.
Factors Influencing Your Investment Returns
Although there is no exhaustive list, there are several factors that can influence your property investment returns. Let us give you a rundown of a few:
Location
Location plays a pivotal role in property investment. Properties situated in economically stable and growing areas tend to appreciate in value over time. Moreover, proximity to amenities and services is crucial for securing high returns. Areas with access to employment opportunities, schools, and public transport are in high demand, resulting in higher rental yields.
Safety is another critical factor influencing property value. Areas with low crime rates generally command higher property values as they are perceived as safer and more desirable places to live.
For investors, understanding these location-based factors can help make informed decisions that maximise investment potential and long-term returns.
Property Type
Different property types offer varying returns. Apartments might provide consistent rental income, while single-family homes might have a lower vacancy rate but require more maintenance. Commercial properties can offer higher rental yields but come with potentially higher vacancy risks and specialised management needs.
Market Demand
Strong rental markets with low vacancy rates lead to higher occupancy rates and potentially higher rents. Conversely, saturated markets with high vacancy rates can lead to difficulty finding tenants and lower rental income. This is why it is necessary to always check market conditions and trends.
Rental Income
One of the primary sources of returns for property investors is rental income. Effective property management practices, like competitive rent pricing, minimising vacancy periods, and attracting high-quality tenants, can maximise your rental income, bring in a continuous flow of income, and directly impact your overall return.
Investment Strategy
Strategic renovations and upgrades can enhance a property’s value and potentially increase rental income. For instance, adding eco-friendly upgrades can increase the value of a three-bedroom home by 8%, while a kitchen renovation can increase the property’s value by +£25,000. However, before completely renovating your entire property, it’s crucial to carefully consider the costs involved and ensure that the upgrades align with the preferences of your target market.
Achieving Optimal Returns
The demand for rental properties in the UK continues to grow exponentially. But the property market has increasingly become more competitive with experienced landlords undertaking several measures in order to get higher rental yields. As a consequence, in order to maximise your ROI, you will need to employ certain strategies to optimise rental yields, minimise costs, and enhance your portfolio’s overall profitability. Here a few things to consider:
- Undertake Thorough Market Research: Before diving into any investment, it is necessary that you conduct market research for the property type you are planning on purchasing. Understanding regional market trends, the demand for residential properties, and its potential for future growth is crucial. Having this information will enable you to make informed decisions about where to invest and what property type is likely to yield the best returns.
- Set Competitive Rental prices: Striking a balance between market value and tenant appeal is crucial when setting rental prices. By aligning your rent with current market rates, you can maximise your income potential while still remaining competitive and attracting qualified tenants.
- Maintain the Property: Effective property management is vital for maintaining and enhancing the value of your real estate property. Regular property evaluations are key to attracting and retaining high-quality tenants. By proactively addressing maintenance issues/needs and making improvements, you can increase rental income as well as create desirable living environments — cultivating tenant satisfaction and encouraging lease renewal.
- Tenant Screening: An extensive screening process can assist property owners in choosing the best tenants. No one wants to deal with problematic tenants. To combat this, conduct a background check, verify tenant employment history, and ask for references, to ensure that only responsible tenants will live in the property. This will help decrease the chances of property damage or missed rental payments.
- Diversify Your Portfolio: Diversification is an integral strategy in any property portfolio. Spreading your investments across different types of property and location can mitigate risks, maximise potential returns, and ensure a more stable and reliable property investment portfolio. If one market experiences a downturn, your other investments can help offset any losses.
It’s important to emphasise the value of patience in property investment. While following the strategies outlined above can lead to significant returns, it’s crucial to acknowledge that challenges and market fluctuations are inevitable. Property markets go through cycles of ups and downs, which may sometimes be unsettling.
However, adopting a long-term approach to property investment helps mitigate the impact of these fluctuations. Unlike strategies focused on quick profits, long-term investment allows for substantial wealth creation over time. By staying committed to your investment goals and being prepared to weather market changes, you increase your chances of achieving sustainable financial growth through property.
Partnering With a Property Investment Specialist
If you are considering property investment or seeking detailed information about investment returns, we highly recommend consulting with a property investment specialist before making any decisions. These specialists can create personalised strategies tailored to your financial situation and investment goals. They possess deep knowledge of the market and can help you navigate potential risks effectively.
By consulting with a specialist, you gain access to expert advice and insights that can optimise your investment decisions and maximise returns. This proactive approach ensures that you are well-informed and positioned to make sound investment choices in the dynamic property market.
Working With Us
Here at Alesco, working with you to find the right property investment while leaving you with a peace of mind is our top priority. We are committed to helping new and seasoned investors start and grow their property portfolio and bring them the highest possible returns.
Be sure to check out our property portfolio today and don’t hesitate to contact us to find out more or to make an enquiry.
Written by: James Needham
Experienced Team Lead with a demonstrated history of working in the real estate industry.
