Capital Growth

Capital Growth refers to the increase in the value of the asset over time. Frequent national surveys show the average value of house prices, and the rise or fall of these are of great interest to investors.

Capital Growth is an objective for many – but not all – property investors: it should be distinguished from Rental Yield (see below), in that it takes a longer term view of property value as an asset, rather than as an income stream that pays on a monthly or yearly basis.

Capital Growth is measured in the current value of the investment in relation to the original amount of money invested in it.

Rental Yield

Rental Yield refers to the percentage of rental income obtained annually from the property, as a percentage of the original value of the investment:

Gross rental yield = (Annual rental income / Property value) x 100

Rental Yield is an important metric when judging the prospect of an investment opportunity. It is very important not to assume that a high purchase price equates to higher rental yield: in London, for example, properties are costly but the rental yield there is no match for what can be obtained in other areas.

The key takeaway is to remember that a £450,000 property in London with a 4% rental yield is a less attractive investment than one costing £150,000 in the north of England which has a 6% yield: if income is what you’re looking for, look for the percentage yield and spread your investments accordingly.

Stamp Duty

Upon purchase of a new property, Stamp Duty becomes payable to the Government.

In the UK, there is a staged system, which is payable upon purchase.

On your first property in the UK, the first £125,000 is tax free. Thereafter, for between £125-250,000, the amount payable is 2%.

For second home owners, the first £125,000 is 3% and the following £125-250,000 is 5%.

Equity

The concept of equity is in fact quite straightforward: it simply refers to the extent of actual ownership the landlord has over the property.

It can be calculated by considering the balance of the outstanding mortgage and the market value of the home at any given time, and is expressed as positive or negative equity.

Positive equity is the desirable situation to be in, as this means you own most of the property. In situations of negative equity, banks get nervous about the commitment of the borrowers: what is to stop a borrower from walking away from the property in the case of negative equity?

Legal Fees

Legal fees are payable upon purchase of the property. These range from between £500 – £1000, with £850 being the average. These pay for a dedicated property legal team.

Upon completion, more fees may be due, but these tend to be small. These may be for matters such as a property survey.

The legal fees paid up front should cover everything, so be sure to clarify this with any purchase.

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