Metrics are essential to every property investor. They provide a way to analyse current and future investments. The outcome from this analysis will invariably help inform the decision-making process i.e. buy or sell a property. Analysis is often done using benchmarking techniques – where one set of data is compared to another. The data should be relevant and up-to-date.
For property investors, there are lots of sources of benchmark data, such as Land Registry, property portals and historical performance.
One of the most important metrics for a property investor is the return a property can generate. This is known as its yield. This is expressed as a percentage and is based on annual figures.
There are two types of yields – gross yield (annual income generated by a property divided by its price e.g. buy to let property is tenanted and generates a gross rental income per year of £20,000. If it originally cost £100,000 it generates an annual gross yield of 20 per cent.
Net yield is the annual profit income minus costs generated by a property, divided by its price e.g. a buy to let property is tenanted and generates a gross rental income per year of £20,000 with annual costs of £10,000. If the property originally cost £100,000 it generates an annual net yield of 10 per cent.
Return on Investment
Another important metric for an investor is a property’s Return on Investment (ROI). This is the annual profit (income minus costs) generated by a property divided by the cash invested e.g. a buy to let property is tenanted and generates a gross rental income per year of £20,000 with annual costs of £10,000. If the property originally cost £100,000 and the landlord bought it using a mortgage with a cash deposit of £20,000, then it generates an ROI of 50 per cent.
Return on Investment is often referred to as Return on Cash or Return on Capital Employed.
Meanwhile, it’s important to remember that these metrics are based on historic rental income only, and don’t take into account any future events, such as capital growth that a property may experience. The future is difficult to predict, so it’s advisable not to rely too heavily on metrics that forecast a future.
A metric that looks at the income a property is not generating is known as void periods. These relate to the time a property is not occupied and therefore not generating a rental income. Voids are expressed as a percentage and based on annual figures e.g. a buy to let property is only occupied six months per year, therefore it’s unoccupied (void) for 50 per cent of the time.
Void periods can be caused by a change-over in tenants. They’re important for property investors to understand.
Loan to Value (LTV)
This is important, particularly if you are raising finance. Typically, a finance company will lend you a percentage of the property value. This can be between 50 to 80 per cent depending on how the lender views the risk. Most mortgage lenders offer terms based on a 75 per cent LTV i.e. they will give you 75 per cent of the property value and expect you to put in the other 25 per cent.
Finally, most property metrics are calculated before the impact of tax i.e. income tax, corporation tax and capital gains tax. These will all reduce the investment performance of a property – so always seek professional advice when planning to purchase or sell.