Hi Newy777,

You can purchase on option on a property which gives you the irrevocable right to purchase that property within a given time frame.

Say for example you purchase a 18 month option… you now have 18 months to exercise your right to purchase the property – during these 18 months the property is not to be sold to anyone but yourself.

If however, you decide not to purchase the property you simply let your option expire (after the 18 months in this example).

An option is similar to a down payment in the sense that it secures your right to obtain the property, but if you choose not to purchase there is no hard feelings, you simply lose the money you spent on the option.

Hope that helps,

Lance

Hi Harry,

It all depends on what your strategy for creating wealth is. It's important that you decide on why you are investing in real estate. Are you investing for income (cashflow) and/or growth (capital gains)?

Using ROI and CoCR evaluates the potential an investment can have. However, you must use this information with your investment strategy to decide whether this property will suit your needs. An investment that will work for you, may not work for another investor and vise versa.

The figures you have shown tell me that your investment will pay for itself (the down payment of $20,000) in under 5 years. What other benefits does this investment hold? What is the estimated annual growth of the property? How can you improve the value of the house? Can you find ways to increase the rent? Can you negotiate the price or terms? etc.

Remember, it's always good to research, keep asking questions and you'll find better ways to invest.

Kind regards,

Lance

Hi Harry,

There are two common factors to take into account when buying an investment:

1. Return on investment (ROI): is a percentage used to calculate the money gained or lost compared to your total investment cost. Take this example:

You have a $50,000 dollar investment property that earns an annual rental income (cashflow) of say $5,200 ($100 p/w in rent). To calculate your ROI you must divide your annual cashflow by your total investment cost. i.e. ($5,200 / $50,000) x 100 = 10.4% ROI.

2. Cash on Cash Return (CoCR): is a percentage used to calculate the money gained or lost compared to the amount of money you have used to invest (such as a down payment on a house). Example (using the same property described in example 1):

You have a $50,000 dollar investment property with a 80% loan ($40,000), meaning you must pay $10,000 as a down payment. Your annual rental income (cashflow) is again $5,200 ($100 p/w in rent). To calculate the CoCR you must divide your annual cashflow by your total cash invested. i.e. ($5,200 / $10,000) x 100 = 52% CoCR.

These simple calculations help you decide whether an investment is worth looking further into or whether you should start looking elsewhere. It is also a good way to measure the performance of your current investments.

Good luck!

Lance