The goal of most property investors is to maximise their profit and reduce their costs. While there are many metrics that can be used as a measure of profitability, return on investment is one of the most widely accepted.
What is Return on Investment (ROI):
Return on Investment is a metric used by property investors and developers to evaluate the profitability of a project relative to its cost. ROI is easy to understand as a higher ROI translates to a greater return. The ROI can be calculated by dividing the net profit by the total cost of the investment.
How to Maximise your ROI:
Reduced Purchase Price:
When calculating the ROI of a property the purchase price is an important consideration. With this in mind, a decreased property purchase price would result in a higher ROI for the purchaser. By negotiating with the seller of the property, the borrower can potentially reduce the purchase price and increase their ROI. Below Market Valuations (BMV) are another common way in which property investors maximise their ROI. By purchasing a property below its market value investors are able to reduce their initial capital outlay and maximise their net profit.
Decrease Maintenance and Operating Costs:
Given their adverse effect on net profit, higher than usual maintenance costs can greatly reduce an investor’s ROI. In order to reduce maintenance costs (and maximise ROI) investors should ensure that their property is inspected on a regular basis and repairs are made as needed. Similarly, high operating expenses can contribute to a weak ROI. Costs like energy bills, insurance costs and council tax should be forecasted and managed to ensure that they do not have an unforeseen impact on the ROI.
Leverage your Financing:
Given that the ROI is calculated using total cost of the investment, reducing the initial capital investment will result in an improved ROI. Once common way of reducing this initial investment is through the use of debt. Debt allows investors to invest less of their own money while still achieving the same return, the end result being a higher ROI. It is important to consider the impact of debt servicing on cash flows as higher debt levels will require disciplined cash flow management.
Take Advantage of Tax Benefits:
By taking advantage of certain benefits and deductions investors can maximise their return. Some maintenance and repairs costs are tax deductible meaning they can be subtracted from the taxable income. In addition to this interest on mortgage repayments is generally tax deductible. By taking advantage of these tax deductibles, investors can reduce their overall tax expenditure, increasing their net profit and maximising their ROI.
Make Use of a Independent Mortgage Broker:
By using an independent mortgage broker, investors can reduce their overall expenses and enhance their ROI. Independent mortgage brokers can help investors reduce their costs in a number of ways:
Access to More Products: Independent mortgage brokers spend a large portion of their time forming and managing relationships with different lenders, from banks to building societies. This means that mortgage brokers have an extensive network of potential lenders, each with their own mortgage products. By leveraging this network, mortgage brokers are able to find the products that are best suited to their clients requirements. In this way mortgage brokers can help their clients reduce their costs significantly. These reduced costs may be in the form of arrangement fees, monthly interest payments or exit fees. By reducing these costs investors are able to maximise their net profit and, in turn, their ROI.
Negotiating: Through years of experience, independent mortgage brokers have accumulated a variety of soft-skills. One of the most important being their ability to negotiate. As intermediaries, negotiating is an important skill for mortgage brokers. With this in mind, mortgage brokers are able to assist their clients by reducing the overall cost of their mortgage. In addition to this, brokers can assist their clients by expediting the application and underwriting process, resulting in the timely release of funds for the investor.
Industry Experience:
Mortgage brokers can use their industry knowledge and experience to reduce the overall borrowing costs for their clients. By understanding the hidden costs of facilities, mortgage brokers can advise their clients to ensure that they are making fully-informed decisions that reduce their overall costs. In addition to this, understanding the structure of your loan is crucial to reducing costs, from fixed vs variable rates to early repayment penalties, having a mortgage broker by your side can be crucial in reducing costs and maximising your ROI.
As you can see there are a number of ways in which investors can maximise their return on investment. It is important that these factors are considered prior to embarking on your real estate investment journey.