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Long term investment returns?


Predicting investment returns is a bit like trying to forecast the weather. A few sunny days doesn’t necessarily make a great summer.

Residential investment is much the same. What you really need to be able to do is predict what your investment returns will be over the whole term not just a short period. Being able to address this question is critical for serious long-term investors who need to establish whether the effort and risk of tying up their capital will give them their required returns.

Most investors use only very simplistic calculations if any to appraise an investment. The most commonly used measure is the yield. This can be gross or net (after expenses) and measures the ratio of rent to the capital value of a property (see previous article the mystery of the yield ). Yields are useful in that they can indicate whether a property is historically expensive and also the likelihood that revenue from the investment will be able to cover the prevailing loan costs. However, yields only give a snapshot of the relationship between income and value. What they do not do is measure the value to the investor over the entire life of the investment. As you will probably appreciate, a property investor receives a return on their investment in two ways:

1. through any surplus rent i.e. revenue after costs have been paid and or
2. in the form of an increase in capital value.

Their total returns being the sum of these.

But how do I measure the returns over the course of the investment?
The flippant answer is with difficulty. What you must remember is that when trying to measure these potential returns, the financial assumptions on which calculations are based are unlikely to remain the same.

For instance, you hope your rents will go up, you also anticipate property values will rise. Complicating things even further is the fact that we also need to account for inflation. This means that a pound in your pocket now is worth more than it will in 30 years time. You only have to think back to how much a Marathon…sorry a Snicker bar cost 30 years ago to realise this. Any calculation will have to take into account how this will affect future values and returns. All this is the ‘bread and butter’ for surveyors such as myself, but I appreciate those unfamiliar with the concept can find it somewhat confusing.

This is exactly why I have developed the INVESTOR APPRAISER, which is found towards the bottom of the Property Hawk home page. This tool is there for investors to calculate what returns they can expect either from an existing property or a potential investment.

The INVESTOR APPRAISER for the first time ever puts the investor in charge. Simply establish what you think the figures are likely to be e.g. acquisition costs, the mortgage rate, rents and other revenue costs. Then decide how these are likely to change over the investment period e.g. the average annual rise (or fall) in property values, rents.

Then you are free to CALCULATE the expected total and annual return from your investment. This figure can then be compared to the returns from alternative investments, such as putting your funds in a building society account. Once this calculation has been produced it can also be saved if you are a registered user, so that at any stage you are able to retrieve the calculations and compare it against another or even to edit it in the light of new information or assumptions.

The INVESTOR APPRAISER gives the power to individual investors to make their own decisions.

Off course, it’s true with property investing that ultimately it is only at the end of the investment period that you can establish your actual returns and for this you will most likely have to wait many years. The PROPERTY HAWK INVESTOR APPRAISER however does give you the power to make informed long-term predictions.

Using these you should be better placed to make the important investment decisions that are vital for successful property investing. Unfortunately, I can’t offer any help on predicting the weather. But if anybody has a weather appraiser that they have developed I would be more than happy to feature it in a forthcoming article.

If this article has raised any thoughts or opinions please visit the PROPERTY HAWK FORUM to register your comments or discuss how you evaluate what is a good prospective property investment.

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