What Returns Can I Expect From My Property Portfolio?

With the buy-to-let market flourishing across the UK, many people are considering starting or expanding their property portfolio to take advantage of such market buoyancy. As such, many would-be investors have asked our team at Centrick one simple question – what returns can I expect from a property portfolio? Although there is no one-size-fits-all answer to this query, it is certainly important to understand what to anticipate as you begin or continue your property journey. Return on Investment (ROI) is key for understanding how quickly your portfolio will grow, whether you can take up property investment as a full-time career, and whether you have the capital to reach your goals. In this piece, Centrick will be guiding you through the investment process, how to bolster your portfolio to weather any challenges, and which parts of the UK are prime investment locations for 2023 and beyond.

Key Terms

Before delving into the returns you can expect from your portfolio, it’s important to understand the difference between the terms ‘return on investment’, ‘capital growth’ and ‘rental yield’.

Return on Investment and Capital Growth

ROI is a good parameter to determine how successful your investment is by considering how much you have financially gained from your investment when compared to how much it initially cost you. This can be calculated by dividing the profit you have made from an investment by its original cost. For example, if you purchased a property for £200,000, and sold it for £225,000, this results in a £25,000 profit. By dividing this £25,000 profit by the original £200,000 cost, you get 0.125, or a 12.5% return on your investment. This is resoundingly similar to capital growth, which pertains to the increasing value of an asset – in this case, real estate – over time by comparing the property’s purchase price with its current market value and measuring this difference. For example, if a property was purchased in 2022 for £200,000, but is given a market value of £250,000 in 2024, this represents £50,000 capital growth.

Rental Yield

This is the overall return you generate from rental income over the course of one year as a percentage of the property value. This percentage is calculated by dividing your annual rental income by the property value. For example, if you purchased a property for £200,000, and charge £10,000 per year for rent, you will produce 5% gross rental yield. To calculate your net rental yield, you take your service charge, letting fees and any other additional costs away from your gross rental income before doing the calculation.

Time, Effort and Money

Factors such as return on investment, capital growth and rental yield are all directly impacted by how substantial your portfolio is, how much money you’ve invested, and how much time you’re willing to invest in producing sustainable portfolio growth. For example, adding an extension, applying for a HMO license, or choosing partners to help manage your portfolio can all be ways to reap better results from your property portfolio, but will take time, effort and money.

One way you may be able to optimise the capital you have available is through leveraging your portfolio. Leveraging is a strategy that many investors use to build a portfolio relatively quickly and without as much up front capital as a cash investment. It involves releasing equity from your current assets to secure further investments. For example, in year 1, you might purchase a £200,000 property with a £50,000 cash deposit and a £150,000 capital repayment mortgage (75% Loan to Value). If your property then experiences 10% capital growth and is now worth £220,000, and you have also paid £5,000 off your mortgage, you could take out £25,000 equity to put down a deposit for a second investment property, leveraging the capital you have available and meaning you only have to put in £25,000 of your own funds to purchase another £200,000 property. The more capital growth you generate, and the more you pay off your mortgages, the more equity you will have. You might set yourself a goal of building a portfolio of 5 properties over 10 years using this method, by which time you can decide whether you want to continue to add to it, enjoy the rental income and capital growth you are generating, or consider offloading your assets.

What If The Property Market Declines?

UK property is generally deemed a stable investment in comparison to other assets, as people will always require a place to live, especially in densely populated cities, business hubs and near sites of interest. You can often expect consistent returns from your portfolio, even if the market declines, if you are able to source properties in desirable locations, stable long-term tenants and avoid void periods across your portfolio. So long as you are able to respond quickly to any fluctuations in the local economy, whilst remaining observant of property market trends, you should be able to make your portfolio as resilient as possible. Here are some points to consider:

• Re-assess factors such as electricity and water bills if they are included in your rental cost: it may be more beneficial for you to increase the rent to cover this, or pass responsibility for this over to your tenants
• Consider short-term leases that allow you to be reactive to the market
• Speak to an asset management professional who can advise you whether offloading some of your units is the best option to keep your broader portfolio afloat
• Try not to panic – property is a long-term investment and with Stamp Duty and other additional purchasing costs investors should be planning to hold their properties for 10-15+ years to get the most from a portfolio.

Avoiding The Void

One of the most important factors when calculating the returns from your property portfolio is the possibility of void periods. These are periods of time where you do not have a tenant in situ, and therefore have no rental income. This is especially detrimental to your returns if you are still paying a mortgage on this property, as your outgoings could begin to supersede your incoming profits.

It is important to note that when rental yields, capital growth and ROI are calculated in reference to buy-to-let units, void periods are not considered. If you have reason to believe that your units will experience void periods – for example, if you have an HMO or student property you must take the summer holidays into account to accurately predict your returns.

What makes a good yield?

Many investors believe that 7% rental yields are optimal: however, the average UK yield sits at 3.63%, making anything above this a strong rental yield. According to an analysis carried out by SDL Auctions by comparing the average property price and average rental price of properties in key cities, the best English city for rental yields is Birmingham, with an average 7.03% yield, making it an exceptional place to invest for impressive returns. Other cities with average rental yields over 6% include Manchester, Portsmouth, London, Nottingham and Lancaster. What’s more, forecasts for the rental market in 2023 and beyond pinpoint key cities such as Nottingham and Manchester for accelerated growth, with the private rented sector predicted to see a 4.5% boost in the coming year.

It’s also important to remember that the yield is not the be all and end all of an investment. Both yields and capital growth should be considered when looking at the performance of your portfolio, to provide an honest view of how successful your investment is. You may have a property achieving a 4.5% yield, but generating 5% capital growth per year, or one achieving an 8% yield only generating 2% capital growth per year. Your investment goals will help you to decide which types of properties you want to prioritise.

Want to make sense of your property portfolio?

Our team of asset management specialists, partnered with our knowledgeable team of sales and lettings experts, are able to help you make the most of your property portfolio and make sense of your returns. For more information on how Centrick can transform your buy-to-let portfolio, contact our team below:

Written By

Jenna Coghlan

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