How to weigh up a potential property investment – Rental Yield Vs Return on Capital Invested.

How to weigh up a potential property investment

When you register with your local estate agents for a potential investment purchase, it won’t take long before you are asked “what yield are you looking for?”.  Traditionally this measure has been used to assess the potential return provided by an investment and is calculated by taking the annual rental income, divided by the property purchase price, for example:

Purchase Price: £250,000 Monthly Rent: £1000pcm
Rental Yield: £1000pcm x 12 months / £250,000 = 4.8%

In the above example, you might think that as long as a return of 4.8% is more than you could achieve by simply putting your cash into a savings account, then you are better off investing in property?  Right?  Well it’s not quite that simple…

The calculation explained above assumes that you are buying the property with cash that would otherwise be in your bank account, however if you are financing the purchase with a buy-to-let mortgage, then you may only be putting a quarter of the purchase price down as a deposit.  Furthermore, any other expenditure, such as repairs and maintenance, is ignored entirely.

So is there a better way to assess the viability of a potential rental investment?  We believe so.

Return on Capital Invested (ROCI)

This method of assessing a rental investment takes into account the pre-tax profit (rent – expenses) as a percentage of the amount of capital (e.g. cash deposit) that you are going to have tied up in the investment, for example:

Purchase Price: £250,000
25% Deposit: £62,500
75% LTV Mortgage: £187,500
Purchase Costs: £4,000 (Stamp Duty; Solicitors)
Total Capital Invested = £62,500 Deposit + £4,000 Purchase Costs = £66,500
Monthly Rent: £1000pcm
Monthly Mortgage Interest (with a mortgage rate of 4%): £625
Monthly Service Charges, Repairs & Maintenance: £175
Monthly Profit = £1000 – £625 – £175 = £200pcm
Return on Capital Invested (ROCI) = £200pcm profit x 12 months / £66,500 = 3.61%

As the above example demonstrates, the actual return on the capital invested is much lower than the ‘rental yield’ calculation would suggest.  This example is even more shocking when you look at how the ROCI shifts if the mortgage rate went from 4% to 5%.  After a quick re-run of the calculation, at a 5% mortgage rate, the ROCI drops to below 0.8%.

The moral of the story – if you are buying an investment property with mortgage finance take the time to calculate the ROCI, otherwise you may find out that the monthly income you were promised by the eager estate agent disappears into thin air.

Alex Evans

You May Also Enjoy

small house bird box
Breaking News

UK First Time Buyers better off than many other global nations

Is it really that bad being a first-time buyer? UK better off than many other global nations when it comes to affordability The latest market analysis from Yopa, the full-service estate agents, reveals that first-time buyers (FTBs) in the UK may be paying 63% more to get a foot on the property ladder than they…
Read More
new build homes colchester essex
Breaking News

Building Safety Regulator Reform

The Government has announced reforms to the Building Safety Regulator, including leadership, process and investment. The changes are hoped to deliver 1.5 million homes. The reforms pave the way for creation of a single construction safety regulator, as recommended by the Grenfell Tower enquiry. David Smith, property litigation partner at London law firm Spector Constant…
Read More
Breaking News

New anti-money laundering rules now in effect: what landlords need to know

New anti-money laundering (AML) rules came into effect this month, marking a significant change for landlords and the lettings industry as a whole. The new rules mean financial sanctions checks are now required for all lettings, regardless of how much rent is charged. Here, Steve Bond, managing director of residential lettings for Beresfords, explains what…
Read More
Breaking News

What landlords need to know about the upcoming Renters Rights Bill

The government’s long-awaited Renters Rights Bill is one of the most significant overhauls of the private rental sector in decades. While it has not yet received royal assent, the legislation is expected to come into effect late this year, or early in 2026. With the bill moving closer to becoming law, Steven Bond, managing director…
Read More
Breaking News

Mortgage approvals bounce back in May

The latest figures show that: – Mortgage approvals on house purchases for May sat at 63,032 up 3.9% from 60,656 in April. The monthly increase seen in May marks the end of four months of previous decline, with approval levels having fallen each month since January of this year. Approvals are also 2.5% higher than…
Read More
Breaking News

Money and Credit – May 2025

Key points: Net borrowing of mortgage debt by individuals increased by £2.8 billion to £2.1 billion in May, following a large decrease in net borrowing of £13.8 billion to -£0.8 billion in April. Net mortgage approvals for house purchases increased by 2,400 to 63,000 in May. Approvals for remortgaging also increased by 6,200 to 41,500…
Read More