Traditionally, property investors and marketers alike looked to an apartment's rental yield to calculate the opportunity and risk in the asset. Simply put, the rental yield is the annual rental income expressed as a percentage of the property's value.
So, if a flat worth £500,000 generated a rental income of £1,500 per month, or £18,000 per year, then its rental yield is 3.6%.
However, and particularly as the buy-to-let market has softened of late, landlords are becoming wary of looking at the rental yield in isolation when taking a view on a property investment. This is chiefly because it does not take into account expenditure outwith the initial purchasing cost, such as agency management fees, maintenance, mortgage interest and taxation.
Rental income and the value of a property each fluctuate, and it's important for investors to determine whether their primary motivation is capital growth, a stable income/return, or a mixture of the two.
Capital growth is the value by which the property goes up over time. Of course, a property's value can also fall. The movement is a direct result of the supply of alike properties, and the demand from relevant tenants. The percentage of the original purchase price by which a property's value has changed represents the return on investment from a capital growth perspective.
Taking the aforementioned £500,000 flat, and assuming it had appreciated over time to a value of £600,000, the return on investment would be 20%.
In the long term, properties in London tend to appreciate, but predicting an asset's future value in order to calculate capital growth is pure speculation, and you can only be certain in calculating capital growth subsequently. When disposing of the asset, you may need to pay capital gains tax on any profit gained.
Of course, investors have to determine the opportunity cost of tying £500,000 into a property which, particularly in the current market, can take some time to liquidate, in order to achieve 20% capital appreciation over several years. This is a particularly difficult decision at a time when the majority of landlords are breaking even at best, in terms of their monthly expenditure on the asset compared to its monthly rental income.
That said, there are tremendous opportunities for investors who are currently enjoying discounted property acquisitions as a result of their peers attempting to exit the market and liquidate their assets. By the same token, many of our clients who were considering selling properties are now 'riding the storm' and achieving great rental incomes from both local corporate tenants and short-term stays, with an expectation that the capital growth will rise again in the medium to long term.
At Harrisons, we invest ourselves, so we understand the trials and tribulations that our clients face on a first-hand basis. Specialising in Canary Wharf and the surrounding districts, each of our experts has been with us for over five years on average, and can advise on the best course of action for your investment motives. If you're looking to extract more from your portfolio, get in touch with us today.