When it comes to property investment, there are a lot of terms and concepts that can be confusing for new investors. In this post, we'll define six key property investment terms that all buyers should know. By understanding these terms, you'll be in a better position to make informed investment decisions. Let's get started!
1. Return on Cash Invested
Return on Cash Invested (ROCI) is a financial metric used to measure the profitability of an investment. It is calculated by dividing the cash return from the investment by the initial investment amount. The higher the ROCI, the more profitable the investment.
Several factors can affect ROCI, such as the length of time the investment is held, the level of risk involved, and the timing of the cash flows. In general, however, ROCI is a helpful tool for assessing the profitability of an investment.
2. Gross Yield
Gross Yield can play an important role in real estate investing. These are the annual returns on a property before expenses, depreciation, and other factors are deducted. Gross Yield can tell you a lot about a property’s potential return on investment. For example, a property with a Gross Yield of 10% is likely to be a better investment than one with a Gross Yield of 5%.
When considering Gross Yields, it’s important to remember that they can vary depending on the type of property, the location, and the market conditions. As a result, it’s important to do your research before making any investment decisions.
3. Net Yield
Net Yield is a term used to describe the overall profitability of an investment. It takes into account not only the return on investment (ROI), but also the costs associated with the investment, such as taxes, fees, and other expenses.
Net Yield can be a useful metric for comparing different investments, as it provides a more accurate picture of actual returns. However, it is important to remember that Net Yield does not take into account the risk associated with an investment. Therefore, it is always important to consider both Net Yields and risk when making any investment decision.
4. Freehold v Leasehold Property
Freehold and leasehold are two different types of ownership for a property. Freehold means that you own the property outright and can do whatever you want with it. Leasehold means that you only own the property for a set period. At the end of the lease, the property reverts to the owner of the freehold.
Because freehold ownership gives you more control over your property, it is generally more expensive than leasehold. However, both have their pros and cons, so it’s important to weigh up all the options before making a decision. Freehold ownership gives you more control over your property, but it also comes with more responsibility.
You’ll be responsible for maintaining the property and paying any bills, so it’s important to make sure you can afford it before committing to a freehold purchase. Leasehold ownership is usually cheaper than freehold, but you’ll have less control over your property. The length of your lease also means that you could end up paying more in the long run if you decide to renew it. Ultimately, the decision of whether to buy freehold or leasehold will come down to your circumstances and what’s most important to you.
5. Service Charge
Service charges are fees that property owners or tenants pay for the maintenance and upkeep of the property. Service charges can be found in many different types of properties, from residential to commercial. Service charges can cover a wide range of services, from repairing appliances to landscaping. In some cases, service charges may also include utilities such as water and trash service.
Service charges are typically billed on a monthly or yearly basis. Property owners or tenants should carefully review their service charge agreement to see what is included in the fee. Service charges can be a great way to keep a property well-maintained without having to worry about unexpected repair bills.
6. Types of Mortgages
There are many different types of mortgages available, and each one has its advantages and disadvantages. The type of mortgage that you choose will depend on your circumstances and objectives.
One popular type of mortgage is the buy-to-let mortgage. This type of mortgage is designed for people who want to buy a property to rent out. The main advantage of a buy-to-let mortgage is that you can use the rental income to help make the monthly payments. However, there are also some risks involved, as you could find yourself in negative equity if the property market declines.
Another common type of mortgage is an interest-only mortgage. With this type of mortgage, you only have to make payments on the interest each month, rather than paying off any of the capital. This can make repayments more affordable in the short term, but it means that you will owe the full amount at the end of the term unless you have investments or savings in place to cover it. There is also a risk that your home could be repossessed if you fall behind on the payments.
Conclusion
It’s important to understand these property investment terms before making any decisions about investing in property. With a little research, you can find the right type of investment for you and avoid any potential pitfalls.
