Return on Investment or Capital Employed Formula?

by Readers Question

11:42 AM, 9th May 2018
About 6 months ago

Return on Investment or Capital Employed Formula?

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Return on Investment or Capital Employed Formula?

Hi all, I’m new to this website and I have a question. What is the formula you use for return on investment/return on capital employed/rental yield? Would you mind sharing?

I just need a couple of baseline formulas to get me started. Many thanks to you all, great website. I have searched and found an article 4 years old…would the same formulas apply?

Might be a beginner question for some of you.

All help appreciated.

Mateen.



Comments

Mervin SX

13:29 PM, 13th May 2018
About 6 months ago

Mateen,

There are lots of ways you can look at you BTL numbers. I will explain below how I look at mine:

I use net Return on Investment (ROI) as a basic rule of thumb for selecting my investment BTL property but I also check at the end of every tax year, how my portfolio is performing. I only purchase if the ROI is over 8% net and I currently run my portfolio with a ROI of 22% net. Here is how to calculate net ROI:

Let’s say you are looking at a property of £100,000 and the cost of purchase includes a deposit of £20K, stamp duty of £3K, mortgage broker & application fee of £1K, mortgage product fee of £1k, legal fees of £1K – in other words, a total of £26K invested. Now let’s look at your rental income of £600/month, mortgage interest payment of £250/month and other costs of £50/month. This gives you a gross income of £300/month and an income tax of approx. £60/month (assuming you are a 20% tax payer and you have other income that takes you over the free allowance, etc.). Therefore a net income of £240/month or £2880/year.

Therefore, the net ROI on this investment is the percentage return based on you net income = 2880/26000 = 11.07% net ROI. Now which savings account or ISA can gives you that? Of course the variables here are the mortgage interest payment, other costs and your income tax.

I also look at net Return on Revenue (ROR). This is the percentage of net income against the revenue and tells you how much of your rent are you able to turn into net income. I currently run my portfolio at approx. 50% ROR net. For the above example = 2880/7200 (12 months rent) = 40% net ROR.

Hope this helps.

Cheers,
Mervin

MateenGh.

6:57 AM, 14th May 2018
About 6 months ago

Reply to the comment left by Mervin SX at 13/05/2018 - 13:29
Hello Mervin, Thank you for this example, I will take this formula and work it out with my figures. Thank you for spending the time to answer.

MateenGh.

7:02 AM, 14th May 2018
About 6 months ago

Thank you all for your comments. I should have added, I'm not brilliant at maths, and I get nervous about figures so really need time i.e. write it down slowly and analyse. I get embarrased to admit this as I see how quick everyone else is with numbers. However in order to help me over my embarrassement, my sister said 'you've managed to fund yourself (and others) in a very decent way for 30 years, despite your nervousness around numbers - so don't beat yourself up.' Thank you all for taking the time to help me, I may come back to you for an actual algebraic formula (it's the only way I can do it). I really appreciate your sharing your expertise.
Mateen.

MateenGh.

7:09 AM, 14th May 2018
About 6 months ago

Reply to the comment left by peter thomson at 11/05/2018 - 00:52
Hello Peter, this is interesting, and yes easier to do a very quick read. Thank you.

MateenGh.

8:10 AM, 14th May 2018
About 6 months ago

Reply to the comment left by Mervin SX at 13/05/2018 - 13:29
Hello Mervin, I'm confused over your ROR example...
[I also look at net Return on Revenue (ROR). This is the percentage of net income against the revenue and tells you how much of your rent are you able to turn into net income. I currently run my portfolio at approx. 50% ROR net. For the above example = 2880/7200 (12 months rent) = 40% net ROR.]
1) I understand the 2880 is net income over the year - but you already know that by the earlier calculation
2) Also, I don't understand where the 7200 comes in.
Would you mind explaining?
Thank you, Mateen.

Mervin SX

8:13 AM, 14th May 2018
About 6 months ago

Mateeen,

Most of my discussion refers to ROI. And I can see you are comfortable with arriving at the £2880 net income.

Another measure is ROR (return on revenue). This is the percentage of net income over total rental income. The total rental income per year is £600 x 12 = £7200.

So, for this example, the net ROR is 2800/7200 = 40%

Hope this helps.

Regards,
Mervin

MateenGh.

10:11 AM, 15th May 2018
About 6 months ago

Reply to the comment left by Mervin SX at 14/05/2018 - 08:13
Thank you Melvin, I see how you came to this. It's really helpful, I will use this to see value whether I'm getting a good deal in Liverpool.

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