What Is A Good Return On Investment For Rental Property?

When evaluating a rental property investment, one metric stands above the rest: the Return on Investment (ROI). Every investor wants a single, perfect number to aim for, and typically, a “good” ROI for the UK market is often cited as being in the 5−10% range. However, the reality is that ROI is profoundly subjective and depends entirely on your personal investment strategy. A return of 2% might be considered a win for one investor, while 5% may not be good enough for another.

Your specific goal dictates what a “good” return looks like. For example, a cautious investor buying in a prime location like central London might be content with a 2−4% ROI, prioritising long-term capital appreciation over immediate returns. On the other hand, investors focusing on cash flow in regional, high-yield markets will naturally target a higher return, often pushing for the 7−10% range.

To truly master property investment, you need to move beyond general benchmarks and understand the numbers specific to your portfolio. So, what exactly is ROI, and how do you find the right figure for your strategy? In the rest of this blog, we’ll explore the precise formula for calculating ROI, break down all the factors that influence it, and help you define your ideal ROI target.

What is ROI and How Do You Calculate It?

So, what is ROI when looking at a rental property? In simple terms, ROI is the percentage return you make on the money you’ve invested. To work this out, you calculate the net annual income from the property against the total investment.

ROI = (Annual Rental Income − Annual Expenses) ÷ Total Investment × 100

If you were to purchase a buy-to-let property in Birmingham for £250,000, then spend £4,000 on various buying costs like legal fees, stamp duty, etc, as well as a further £15,000 on improvements, your total investment would be £269,000.

Let’s say your annual rental income is £12,000, and your annual running costs (maintenance, insurance, management fees) are £2,000 – this would make your net income £10,000 each year.

Now apply the formula:

ROI = (£10,000 ÷ £269,000) × 100 = 3.72%

This means your investment generates a 3.72% return per year before considering capital growth.

What is a “Good” ROI in the UK?

Of course, we all want the best possible ROI when buying a rental property, but what do we mean by a “good ROI”? 

A good return on investment is a subjective concept – a 5% ROI might be excellent in a low-risk, high-capital-growth area like London, while a higher ROI of 8-10% or more might be expected in more regional markets like the North East or Scotland. 

This means investors should not only look at the percentage return of their investment, but also weigh it against long-term growth potential and the stability of the rental market. For instance, an 8% ROI in a smaller town may seem good in theory, but if demand is inconsistent, void periods could reduce profitability. Meanwhile, a 4% ROI in a thriving city centre with rising property values and high tenant demand could deliver greater wealth in the long run.

Factors Influencing Your ROI

Now that we understand how to calculate your ROI on a property investment and what a good ROI may look like, it’s time to understand the different factors influencing the ROI on your investment property.

• Location: Different regions offer varying returns. Lower property prices in the North often generate higher yields, with cities like Liverpool and Leeds achieving 7–9%. Prime London postcodes may only return 3–4%, but strong long-term capital growth can balance the lower yield. 
• Property Type: This affects your cost and return. While HMOs can deliver a higher yield, they come with more regulations and management. While new-builds may attract tenants that have fewer maintenance needs, older terraced homes are cheaper initially but come with more costs in upkeep of the property.
• Expenses and Vacancy: Ongoing costs like insurance, maintenance, and management fees can reduce ROI. Unexpected repairs or vacant periods also impact returns, so budgeting a contingency (often around 10% of rental income) helps protect profits.
• Capital Appreciation: ROI measures rental income against costs, but long-term property value growth adds another layer to returns. A £200,000 home increasing in value to £240,000 in five years delivers an extra £40,000 gain alongside rental profits.

Beyond ROI: Other Key Metrics

While ROI is a vital metric to track, there are other metrics that savvy investors use.

• Rental Yield: This is the percentage of annual income relative to the property’s value (Yield = Annual Rent ÷ Property Value × 100). A great rental yield can often pave the way to get a strong ROI, so it is a metric worth measuring.
• Cash-on-Cash Return: This, as a metric, is a bit more refined, focusing on the actual cash invested, which is particularly relevant for mortgaged properties.

These other metrics give a more complete picture of property performance. The ROI of a property shows profitability more broadly, the rental yield will show the income efficiency of the property, and the cash-on-cash return will show you how your invested cash is working for you. Using all three means you can make more informed decisions tailored to your strategy.

Finding Your Ideal ROI: Balancing Returns, Risk, and Growth

A good ROI isn’t a quantifiable, fixed number, but a balance of your rental yield, capital growth, and the level of risk you are willing to take. While a 5-10% ROI is typically referenced as a good benchmark in the UK, it is really down to what aligns best with your investment goals.

At Centrick Invest, we understand that every investor is different. That’s why we offer expert guidance to help you navigate the complexities of property investment and access carefully curated developments with strong yields and capital growth potential. Contact Centrick Invest today and let our experts help maximise your returns today!