When you buy an IP, do you calculate your costs in terms of purchase costs (Stamp duty, fees etc..) what you judge its value in rental yield. Ie: the formula is RENT x 52 / Cost of property (does this cost include stamp duty and on-costs?)
Also, We have the option of buying an IP that (A) need a 20,000 reno and (b) once done will be a great rental (neutral). However, the 20,000 spent on reno wont neccessarily be made back dollar for dollar. Should this be a concern.. usually for me, if I spent 20,000 I would want at least 40,000 added value as a result….This IP may not achieve this without a few extra years for capital growth but it will be a nice little rental (pays the loan costs in full)….
I am confused.. How do others see, evaluate this scenario???[inlove][inlove]
Snowflake
There are a few calculations I use.
First, the gross yield = purchase price / annual rent. For a rough figure I use the weekly rent x 50, since this allows for a couple of weeks vacancy.
I also use Cash on Cash Return (COCR). This is a far more accurate figure which takes all the actual out of money costs into account related to the profit I get back.
In your example, this would include the deposit, stamp duty, fees, etc PLUS your reno costs (the amount you pay for out of your pocket, not any borrowings). Also, I make sure to include holding costs like interest, rates, etc since they come out of my pocket (or the profit).
Gross Yield gives me an quick look at the potential of the property. COCR shows me how well I can use leverage to profit from the deal. COCR is what I actually use to guage the value of a deal, either for myself or for my investors.
As an example, If I can buy a house for $100k and it rents for $200/wk, that gives me roughly a 10% yield (200×50 / 100,000)
But, I put down 5% deposit (and include the LMI into the mortgage), the sellers pay all my closing costs and I can sell it for $150k after 2 weeks and a coat of paint. I work out my COCR as (5000 deposit + $250 paint + say $500 advertising costs) = $5,750 money out (of my pocket). Then 150,000 – 100,000 – 5750 = $44,250 profit.
COCR = (44,250/5,750) x 100 = 769%Now don’t get me wrong, I’m not suggesting this is a real deal, it’s just a rather weak example of the calculations I use.
As for whether you should do the reno if your money won’t be made back dollar for dollar, I guess that’s really a question only you can answer. My questions would be “Why are you investing (i.e. what are your goals)?” and “Will this deal get you CLOSER, or FURTHER from your goals?”
Hope that helps,
Craig.
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Ask me about Joint Ventures earning 15+% COCR.
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