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4. Return on initial capital investment - the importance of measuring your returns.

Before investing in property you need to calculate the return on investment (ROI) by comparing the expected income vs the costs. This can be worked out by looking at how much money you need to invest to make an annual return (ROI):

For Example:

  • You buy a £90,000 property and you take out a Buy To Let mortgage which has a loan to value of 75% and requires you to leave a 25% deposit in the property.
  • You have therefore invested £22,500 of your money into this property in the form of a deposit.
  • After all costs you make a net profit of £250 per month, £3,000 per year.
  • £3,000/ £22,500 = 13% return per year on your initial capital investment.

Accelerate Your Property Journey via a Little Money Left In Finance Strategy on Buy to Let Purchases - HOW DOES THIS WORK?

The best way to explain the concept of a “Little money left in Finance Strategy” is for us to explain it via an example in words and figures. This way which ever learning style you have, this should break it down for you:

EXAMPLE EXPLAINED IN WORDS:

  • You want to buy a property that requires a refurbishment with a Buy to Let Mortgage.
  • You refurbish the property to add value e.g. put a new kitchen in, bathroom, redecorate and new carpets.
  • The property then goes up in value.
  • You have an option to refinance your property via a Buy to Let mortgage to pull out some of your money to allow it to be a LITTLE MONEY left in finance strategy.

EXAMPLE EXPLAINED IN FIGURES:

  • You refurbish a property at a cost of £10,000
  • You have solicitor costs of £700
  • Other costs of £2,500
  • You want the property to go up in value enough to cover most of your refurbishment costs, solicitor costs and other costs.
  • Re-mortgage valuation after refurbishment £100,000
  • You choose a re-mortgage product that requires 75% loan to value i.e. you obtain a re-mortgage for £75,000.
  • You therefore need to purchase the property minus all of your costs (Refurb £10,000 + Solicitors £700 + Other £2,500 = £13,200)
  • £75,000-£13,200 = £61,800
  • If you purchased this property for £66,800 you have only had to leave £5,000 of your money in (your initial capital investment), the rest of your money has been recycled out.

RETURN ON INITIAL CAPITAL INVESTMENT EXPLAINED BY LOOKING AT THE INVESTMENT PYRAMID:

Now you understand the importance of Return on Initial Capital Investment it is important that you understand principle 5 of the 11 Principles of Successful Property Investment-

Buy Properties in Good Areas!