I am often asked what a lot of different terms mean in the
property investment field.  After every seminar, workshop or speech there
is always someone asking what ROI really means or what Gross rental really
means. I thought I would compile a list of common property investment terms.  This
list also forms part of the Property Investment Profit System (P.I.P.S.) which
is a great course which you
will purchase here.

Property investment terms

Gross Rental

Monthly or annual rental income you can expect to obtain from your property.
For example, £600 per month or £7,200 per year. Multiple monthly
rent x 12 to get annual rental.

Net Rental

Monthly or annual rental income, net of all expenses. These can include management
fees, service & maintenance charges, repairs, buildings, contents and tenants
insurance, inventory charges, allowance for replacement of furniture if furnished
and so on. Typically you can expect to lose 15 to 30% of your gross rental
on an unfurnished property to various fees.

Purchase price

Purchase price of the property as agreed with the vendor.

Gross Purchase Price

Total purchase price including stamp duty, legal fees, mortgage fees, finder’s
fees and so on. These may add anything from 2% to 7% to the property price.

Gross Rental Yield

Divide the gross rental income by the gross purchase price.  For example,
Gross purchase price £160,000. Gross rental £12,000. Gross rental
yield is £12,000/£160,000 x 100% = 7.5%

Net Rental Yield

Divide the net rental income by the gross purchase price. For example, assume
our £12,000 gross income falls to £9,000 after costs. Net rental
yield is now £9,000/£160,000 x 100% = 6.25%

Net Income

The net rental income, calculated as above, minus your mortgage payments.
Suppose your net rental income was £8,000 per annum, and your mortgage
payments £5,000 per annum, your net income from letting the property
is £8,000 - £5,000 = £3,000.

Free Cash Flow

The amount of cash that a property generates over a period – monthly
or annually. This is usually the same amount as your net income, but may vary
slightly depending on when payments are made and rent is received.

Generally I advise property investors to only purchase property that has free
cash flow, otherwise you are committed to funding the property on a monthly
basis. However, there are special situations where it would make sense to purchase
property with a negative cash flow if it were for a limited period

Capital Appreciation

The amount that your property has increased in value over a specific period,
usually one year. This can either be expressed as a percentage, or as a monetary
amount. For example, you purchase for £200,000 and the property is now
worth £230,000. The increase in price is £230,000 – £200,000
= £30,000. This is £30,000/£200,000 = 15% growth from your
purchase price.

Total annual return

Your total ‘profit’ from a property is made up of the capital
appreciation plus your net rental income. For example, your property cost £120,000
and increased in value by £10,000. Plus you received £3,000 in
net rental income. Your total
annual return is £10,000 + £3000 = £13,000 per annum, or £13,000/£120,000
x 100 = 11% approx.

Equity/Cash in the Deal

The amount of money you need to leave in a particular property will vary from
deal-to-deal. It may include; the amount of the purchase not covered by your
mortgage loan, legal and professional fees, stamp duty, refurbishment costs,
incidentals such as carpets, curtains, white goods, complete furnishings if
appropriate, insurance paid in advance an so on. You need to know the total
amount in order to calculate your Return on Investment (See below).

Return on Investment

Frequently shortened to ROI. This can be calculated by either excluding or
including the capital appreciation. Why should some people calculate it differently?
If you never sell your property then the capital appreciation is theoretical,
whereas the ROI based on rental income alone is very real. On the other hand,
if you view your property as a totality and are willing to sell if it fails
to make total returns that meet your criteria, then including the capital appreciation
is totally valid.

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