The private property rental market is booming, yet according to the latest research, landlords remain alarmingly ignorant when it comes to industry terminology. Studies revealed that just 24% of landlords know what ‘return on investment’ means, 26% know what ‘gross yield’ is and just 12% could identify what ‘gross profit’ means. To clear up the confusion, we’ve put together an explanation of some common property investment terminology that every landlord should know.
Return on investment – As a performance measure, ROI evaluates the efficiency of a properties money making potential. It is calculated by dividing the return of an investment by the cost of the investment.
Gross yield – This is the total income a property has generated, before the deduction of taxes and expenses. In the property market it is expressed as a percentage calculated by dividing the annual return on investment by the current value of the investment.
Gross Profit – The total revenue generated by the property, minus any taxes and expenses. This is ultimately the cash that landlords pocket.
Depreciation – This represents any lost value that may have accumulated over time. Landlords will often face depreciation during a property price slump.
Capital gain – When a property increases in value from the original purchase price, landlords enjoy a capital gain.
Equity – For landlords that have a mortgage, equity is the proportion of ownership they possess. For example, if a landlord owns a property worth £200,000 and have a mortgage of £120,000, they have 40% equity.
Cashflow positive – When the amount of cash coming in is greater than the amount of cash flowing out, this is referred to as cashflow positive. It’s a great place for landlords to be in!
Landlords insurance – This refers to the insurance policy that protects a landlords investment from unexpected incidents. This could be anything from tenant arrears and vandalism to burst pipes and flood damage. A popular way for landlords to secure the cheapest deals is to visit quote compare websites.
Stamp Duty – When purchasing a property valued at over £125,000 landlords must pay stamp duty. This is a government tax that all property buyers must pay.
Buy-to-let insurance – When landlords purchase a property with the intention of leasing it out straight away, they’ll need to take out a buy-to-let specific insurance policy. Without the right cover landlords risk fines or invalidated insurance.