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How To Spot A Rubbish Rental Return

How To Calculate A Rental Return

I am sure that it won’t come as any surprise what I am going to tell you.

If the rental return seems too good to be true, you are probably looking at the wrong numbers…you’re looking at the gross rental return, not the net.  

So what is the solution to this maths problem…I can tell you it is not as complicated as Pythagoras’s formula, instead it is a simple NET return calculation. Go and grab a calculator please as my Maths teacher used to say.

The calculation is very simple…a little bit of plus and minus you have got it. (My maths teacher never said this, this was probably why he had a nervous breakdown).  

Your net rental return is what you get after all of your expenses have been taken out.

Let me give you a very basic example.  

You see there was this old geezer who was selling his apartment at a heavy discount due to ill health.

He paid £165,000 for it and reduced the price to £100,000. Other two bed apartments in that block would rent for £1,000 per month. It sounded too good to miss until I looked into the numbers more closely.

An interest only mortgage on this £100,000 property would see a monthly payment of about £500.

Monthly Rental Income: £1000

Monthly Mortgage: £500

Monthly Cashflow (Cash In Your Pocket) = £500

Sounds good doesn’t it? This is the Gross return though, not the net return. Unfortunately the owner also had this big secret.

The service charge had just increased to £250 per month. Plus I had not calculated in the management fee and insurances.  

So if I were to invest in this apartment let’s look at what the REAL return is on this investment.

Monthly Rental Income: £1000

Monthly Mortgage: £500

Monthly Service Charge: £250

Monthly Management Fee: £100

Monthly Insurance: £50

Monthly Cashflow (Cash In Your Pocket) = £100

hmm…this pie is not looking as tasty as it was before!

Aha…not as lucrative as I first thought, however, I now have a clear picture of the investment, so I can make an informed choice on if this one is a goer or not.

The bottom line is, you must always find out all of the costs involved in the ownership of a property to find out your real rental return.

This should include things like repair, insurance, service charge, maintenance and management costs and also those one-off costs like air-conditioning replacement – you may not have thought about along the way.  

I was caught out by headline rental return on my first two property investments, I quickly learnt my lesson and now make good returns on all my investments…I would love to hear your story, have you ever been caught out by the headline rental numbers?

Kind regards

Loxley McKenzie
Managing Director

 

 

 

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