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Hi Mate,
I try not to use acronyms with people I dont know, particularly when they arent widely used or are based on formulas that aren’t necessarily always the same.
As for the above:
1) Gross Rental Return (GRR)
GRR=(Annual Rent/Purchase Price) x 100
Agreed, I call this rental yield.2) Return On Investment (ROI)
ROI=(Annual Profit/Purchase Price) x 100
What is annual profit? and is this a after-tax or gross amount? Realised or unrealised gains? If the profit considers that it has been held for a year do you consider inflation and what the real worth is?3) Cash-On-Cash Return (CoCR)
CoCR=(Cash Back/Cash Down) x 100
As above. Before or after tax “cash back”? And what is your definition of cash down? Total initial outlay? That’s what I would go with.4) Growth On Equity Return (GoER)
GoER=(Expected Annual Growth/Current Equity) x 100
Why would you use a GoER anyway? Would you not want to work numbers on total growth on your property? just working out what the percentage growth on equity is and not the total amount of equity usable…. I dont see where you would use such a formula, or how it would dictate into your rationale for buying something (see below).5) Net Profit Percentage (NPP)
NPP= [(Annual Cash Flow + Annual Expected Growth)/Cash Down] x 100
I personally dont use expected growth rates in my evaluation figures because it is really speculation. What is to say an area will go up 2%, 4% or 6%? I’m all for considerations of different growth rates, but at the end of the day I don’t use this formula when I evaluate purchasing a property.I do consider growth but not in a formula as above.
The thing is with the formulas, what percentage you need or you consider to be acceptable comes down to your strategy and where the next purchase comes into your goals.
For example (simply) cashflow vs growth. If you wanted a cashflow property then the above figures would all be cashflow biased. If you wanted growth, then perhaps your rental yield (you call it GRR) may be quite low. It depends.
And then there are added considerations. Say you have a house and an apartment both with 7% yields. An apartment is going to have extra (standard) costs of strata fees, sinking fund fees etc., so that eats into your margins.
I am a heavy number crunching guy when it comes to looking at the next investment, and I’ll tell you what I use.
Rental yield = annual rent/purchase price x 100.
This is a good roundabout percentage that gives you an inclination on cashflow. I tend to look at property over 6 per cent where possible, however again it comes down to your strategy (e.g. a buy hold/sell with negative cashflow may have a lesser yield but can be bought $30k under market value).first I work on cashflow returns as this is easy.
Cashflow before tax.
rental yield – interest – outgoingsCashflow after tax.
taxable income * tax rate = tax payable1
taxable income – (rental yield – interest – outgoings – depreciation – (loan costs/5)) * tax rates = tax payable2
tax difference = tax payable1 – tax payable2Cashflow = cashflow before tax + tax difference
tax rates that I use in excel as a guide =sumproduct(–(C30>={18201;37001;80001;180001}),(C30-{18200;37000;80000;180000}),{0.19;0.135;0.045;0.1})
then I work on capital
Total initial outlaySales costs (selling price based on CMA’s)
Cost base
CoCR (but I use after tax profit, so working through CGT etc. and I do them for holding for 12 months and one for less (full CGT))
Tax considerations in trust structures (includes parallel figures for the cashflow above as personal income doesnt come into play for my cashflow/tax credits)
I also work out my equity access, this % is dependent on the type of property – remember the bank will loan different LVR’s dependent on the property type and use.
Then after working out my equity access, I work out my after settlement cash availability vs my total initial outlay.
When you’ve done the above you should have:
before and after tax flow (in personal names)
CoCR if sold (at different CGT)
Equity accessibleAnd then you can work out your accessible equity – total outlay and see how much it will “cost” you to pick this property up (not including ongoing interest if you’ve used equity) out of your capital base.
Anyway hopefully there’s a few bits and pieces in there to get you thinking. A lot easier on a spreadsheet, and again, this is just a guide for figures.
At the end of the day you need to do an evaluation far beyond the numbers. The above might all be terrible but the property is on two lots
and you can knock down and develop. That would be another set of figures for evaluation.It all comes back to strategy.
Good luck and happy investing.
Ben
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This reply was modified 9 years, 3 months ago by
Stannis.
Hi Investa99,
Mate there are a lot of questions in there and I would have a lot of questions for you in order to give you any decent advice, and I would suspect that that is why you’ve had so many views and nil replies. I will throw some questions back to you which I would consider the best way for me to give you advice – that is that you’ll come to your own conclusions as a result of asking more questions and getting the answers to them.
The questions I would ask you is (looking at your dilemmas respectively):
1. Do you live in the area? How much do you know about it? Established vs fringe comes down to a couple of items – what is your pre approval at (as this will dictate how much you can borrow and in turn invest) and what information do you have that supports each area? Break it down as pros and cons for established (better area?/yields?) and pros and cons for fringe (lower entry price?/better yields?/possibly better growth (take off? why do you think it will take off, what evidence is there to support it?)) – all depending on your budget and strategy (as you mentioned).2. It depends on your strategy. Is that too much? its up to the individual to ascertain what is too much or too little – attempt to make it as objective as possible (and not subjective). Work on your strategy – what are you trying to achieve in the next purchase? What is your exit plan? what is your overall goal? These will dictate what your purchase next and what your return has to be.
3. This is a question about the specific market and you should consult the local real estate agents for a comparative market analysis (CMA) for perspective rental yields, and by all means look at the local market through any means to get more information – even go on realestate.com and look through it for rentals in that area and get a feel for it. Go to open properties in that area and ask the RE Agent what the rent would be. Learn the area and ask the locals. RE Agents will be able to tell you what properties rent out faster and why. Always get a second/third/fourth opinion, do not just talk to one person and take their advice as gospel. And of course you can always hire a buyers agent.
4. I dont know what your capital is (cash/equity) that you are going to use, so I dont know how much you need to borrow on a rough listed price. Is it too much? Depends on your strategy and risk, and the potential return of the property (folds back into strategy).
My advice would be to sit down and do a consolidation of everything. This is typical advice I give to a few friends and colleagues – if you have access to equity – how much? How much can you save month to month (do you have a good budget in place and are you saving?)? How much can you borrow? What strategy do you have and what does this dictate for your next property? What is your exit plan for that property? Are you buying in personal names or a trust (dictated by strategy)?
I hope I’ve given you a few things to take away and work on. Good luck, and happy investing. I just got contracts exchanged on my 9th property, and those questions above are questions I always consider for the next purchase or sale.
Cheers
Ben
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This reply was modified 9 years, 3 months ago by
