[CharlesCohen]

Hi,

A property is £140,000.
The going rent is £725 per month.
I have no idea how I work out what the profit margin is on this, can anyone please help me out here? I'm sure it's very basic math but I really am useless in that department.

Sorry if this is posted in the wrong section.

Charles.

[jakester]

Hi,

A property is £140,000.
The going rent is £725 per month.
I have no idea how i work out what the profit margin is on this, can anyone please help me out here? I'm sure it's very basic math but i really am useless in that department.

Sorry if this is posted in the wrong section.

Charles.

Charles - is this a homework problem or are you thinking of moving into a rental property investment?

If this is a homework problem, you'd need to consider other variables before calculating profit margin. What are your monthly maintenance expenses: i.e. property manager salary; do you include utilities in the rent or do you pay for utilities yourself; interest payments for the loan on the property (unless it is bought outright).

It seems that the information you provided is not adequate enough to calculate Profit Margin because you've not listed any expenses.

[CharlesCohen]

Thanks for the quick reply Jakester.
I'm ashamed to admit this is not my homework.
After doing a bit more research I realised what you said is true in regards to it not being as simple as I made it out to be.

We could say it is bought outright, so no monthly payments going out there, and that the utilities and any other expenses are zero. (unrealistic I know)

What I thought was: £725 per month, so x 12 = £8700 a year.

I've also realised it is not a profit margin that I am getting, but a returns margin. So:

8700 / 140,000 = 0.062

0.062 x 100 = 6.2% This has been confirmed as the returns margin %.

Thanks again Jakester and maybe you can also confirm this is correct?

[jakester]

hi again -

Ok, I understand your logic. Basically, you are looking at a very stripped-down form of what's called Return on Investment (ROI for short). Your investment in the property cost £140,000 and you are looking at rental revenues of £8,700 per annum, so yeah, that would work out to be a return of 6.2%. But you must factor in real costs that ultimately impact that rate or return: Property taxes (unless you are not planning on paying them :)); quantifying costs associated with general maintenance to the property; you have to also try to quantify the reliability of your tenants making good on their monthly payments (rental income losses).

So, basically, in pure-form 6.2% return is an accurate calculation but to truly come to what your real return would be, you have to fully account for all expenses: planned or unplanned. Lastly, you must factor in taxes in contemplating your ROI. Because the income you receive from that is investment income, you must consider what your tax liability would be on that. Consider this equation which is basically taking your return, multiplying it by 1 minus your tax rate: 6.2%(1-tax rate). Say you're tax rate was 30%, the real return would be 4.34%. So it's very different is reality from a pure return standpoint.

Well wishes!