Forum Replies Created
Aaaah! My favourite analysis tool, and I am still waiting for someone to show me I’m wrong. It is totally different to cash-on-cash return, which really only looks at the initial cash flow.
This is where I get long-winded, so duck out now if you’re already bored.
IRR is an indicative value which shows you what annual interest rate you would have to be paid (say on a bank fixed deposit) in order to earn the same return, based on a series of cash flows.
These cash flows do not have to be even, as they would be for an annuity. However, the cash flows must occur at regular intervals, such as monthly or annually. The IRR is the interest rate received for an investment consisting of payments (negative values) and income (positive values) that occur at regular periods.
The great thing is that IRR is available on Excel as a standard function, so you just set up your cash flow model over as many years as you like and apply IRR to it. No need for fancy software where you have little control over the inner workings and assumptions.
Here is an example based on Excel help:
Suppose you want to start a restaurant business. You estimate it will cost $70,000 (negative) to start the business and expect to net the following income in the first five years: $12,000, $15,000, $18,000, $21,000, and $26,000.The cash flow series is as follows:
$-70,000, $12,000, $15,000, $18,000, $21,000 and $26,000, respectively.Your investment’s IRR after
four years: equals -2.12 percent
five years: equals 8.66 percent
etc. [of course using Excel]On property investment simulations I allow for capital growth as an inflated or future value FV figure at the end of the period being simulated, eg. at the end of 10 years, based on present capital growth estimates what would the property sell for? Not that you are necessarily going to sell, but the value is still there (theoretically) either through sale or refinancing.
I picked this up from Dolf de Roos, and it is the most useful analysis tool that I have come across so far. Cash-on-cash it too short term for me. What is really great, is that you can build your own spreadsheet with the data on all the properties you are looking at, put in all the income, expenditure, financing etc. dope, apply IRR and presto, you have an evaluation tool that highlights the best option in the bunch.
Any objections?
Good comments from all – especially those ideas on network marketing – lawn mowing – anything.
Your best asset is your youth and your willingness and awareness.
I’m sitting here kicking myself because I am stupid enough to only asked the questions around middle age (yuck!) – after trying a few get rich quick schemes and getting burnt (though only first degree).
Still, have now discovered that growth is an organic process, you cannot reap the crop until AFTER you have sown the seeds, watered, weeded and tended to it. That’s just going against nature.
Now if I only knew what I am learning now about 10 years ago….. still, never too late. Go get it!
Hi Motivstorm
How about we all find an exotic island, not too small, not too big. Set up a government run along business lines – set out the real estate and sell it off/ develop hotels etc., declare tax rates of 5% with 5% import duty and 20% VAT (hit the tourists, not the locals) – make it a tax haven to attract more capital. Import the labour as necessary, on contract. Anyone got one the these we could club together and buy? Call the country Utopia.
I saw the eastern work ethic on visits to Seoul in 2002 – they worked like machines, but as more material comforts have become available and they have become world leaders in manufacture of various goods (especially electronics) they are starting to question why all the hard work, and then you die…..
Glenn
Hi guys
Thanks for the kind comments. Actually, the place is pitched mainly at the local market – Namibia, South Africa, Botswana holidaymakers – who we see as a “more reliable” source for our little place, especially if another 911 hits world travel plans.
You’re quite right, o/seas folks want the Big 5.
We’re a little worried that the agent will pocket some of the income and not let us know – so we monitor them via a guest book and analysis of water and power consumption.
Hi Acey, Rugbyfan, PK
Thanks for the comments and whew, glad the problem is not at my end.
We do intend updating the photos, just so busy renovating we generally don’t even sit on our own deck that much, let alone remember the camera. Trying to co-ordinate clouds and yachts is a bit tricky too…..
Open invitation to see the “oldest desert” in the World. Exchange rate on holidays is in your favour. Plenty of real Africa with first world facitities. Just plugging our tourism here. Watch out for really exclusive tourist traps though.We’re thinking of a trip to Aus in Dec for a look-see – cash flow permitting.
Hi PurpleKiss
The site link worked for me, perhaps my ISP only allows member access to this site? Please try again, but I’ll check with the webmaster.
Glenn
I asked a lot of agents what occupancy they were getting – but statistics were not their strong point, so using my photographic memory I glanced at their reservations book and guessed a 30% occupancy figure. So far, we’re ahead.
I have set up a slightly embarassing web-site – http://members.mweb.com.na/glenetti (may I mention that here? – too late I guess) [worried]
German version still under construction – Tut mir leid. Also need a much better URL. Google’s never going to find this.I wonder, do people go on holiday less in Australia? Marketing is important.
Hi Derek
Total Addict. Sat up to midnight last night with the forum. Not doing much investment with the wife at the moment.[evil5]
Most typical leases are paid at a weekly rate with a requirement, unless otherwise agreed that the tenant will be two weeks in advance.Tenants are also required to pay a bond equivalent to 4 weeks rent upon taking up the lease.
Paying weekly involves so many more transactions – must be an ache. A four week bond (called a one month deposit with us)….. Strange customs from a strange land. Do you folks find these arrangements convenient? Would monthly arrangements not be more practical? Granted on daily basis interest calculations it would be better to deposit rental payments weekly.
I’d love to have a 30 year I/O loan. Let me know when it happens.
Thanks Derek, appreciate your responses here.
Our banks tell me that they only offer commercial loans over 10 years, but for me (yeah sure) they offered a 15 year loan after a board meeting. (Somehow I doubt it).
Do your banks “require” sureties? Can you refuse?
Glenn
I’m absolutely positive that my search for positive cashflow properties has turned out entirely negative so far, to the extent that I was positive that I would have to buy a negative cashflow property just to get started. Now I’ve read a lot of positive and negative debate about positive or negative IPs, and posted some questions about when an IP is to be considered positive or negative, and so far I’m pretty negative about the outcome of the debate – tainted no doubt by my personal negative outcome, but I am doing my best to maintain a positive attitude about the possibility of finding that elusive positive property.
If you got thru all that and are still here, you have stamina. On the more serious side…..
My so-called -ve IP turns +ve in a few short years. Why? My largest expense (finance payments) stay fixed for the term, while minor expenses and income increase with inflation. HENCE, I look not at first year +ve cashflow. I look at return on investment. For me +ve or -ve is a relative term.I could put down 100% capital and have +ve, so my question in another forum was, at what deposit level can I say I am positive or negative? Subjective, no?
I’d rather get 110% finance and contribute a little to -ve cashflow, than tie up capital in a deposit (not so?). Also – I’m not hanging about waiting for the +ves (horrors, what if they really do not exist!) I look at 30 IPs, then pick the highest predicted return using IRR.
Please beat my argument to a pulp so I can learn from you. I confess, Steves’ book is still in the mail.
Hey Mini
No argument. You just made me feel really stupid, now that my own house is almost paid for. Unfortunately I only discovered last year that my own house is no investment.
Having trouble convincing the wife NOT to add that extra room to our house, cause it is no investment – until I realised I can add the room, then get a re-valuation and take the cash out again and invest it appropriately. Sounds like win-win-win.
Acey – I loved your comment about your landlord.
Glenn
Want some comparisons from Namibia, Africa?
but you don’t want a farm in Zimbabwe – you could pay with your life.
Seriously though, just ask the questions……
Your biggest risks are political upheaval and unpredictable and violent exchange fluctuations. However, high risk = high reward, as always.
I’m self employed and really enjoy the work, but just sometimes I’d like to tell a Client to get £$%^ and take on only the intersting or challenging work.
I agree with you guys, money ain’t everything, as I discovered when I spent 8 months as a Real Estate Agent doing property management [there – my confession is out – wrong place for it – I’m not proud of it – forgive me folks] however, I digress = biggest mistake of my life but greatest lessons learned about what is important (like sanity).
Another aside = being a letting agent is the pits. You get grief from the tenants and the owners ALL the time – especially when you are a bad one like I was.
Retirement means different things to different folks. My old man is 84, retired at 65, but has worked as a hobby ever since, when he felt like it, went fishing if the conditions were right, had another beer if they were not – I’m hoping I can beat him to it, this forum is part of the springboard – not so?
More thoughts.
Interesting that in Australia you work with weekly rental. We work monthly for both loan repayments and rental, so the two are easy to compare.
Does this mean that rental in Oz is actually paid weekly? Do loans run weekly or monthly?
Also, I read that in Aussie interest only mortgage payments are possible? True?
My local brokers say it is not allowed here – capital must be repaid. Which is sort of silly when I can re-finance with any financier over and over again anyway (limited by costs of course).
Any answers on this one?
Hi Zack
We don’t quite trust the Agent’s marketing effort, so for now we are doing our own marketing. The Agent is still useful to find the odd tenant, hand over the keys, check inventory and clean before/after.
We have a 2-tier commission arrangement with the agent – less if we introduce the tenant and higher for the agent providing a tenant.
We have essentially taken a residential property and turned it commercial. We’re keen to see this “business” start well, so have not left it all to the Agent (yet). Occupancy is still fairly low, but it is early days, and we anticipate return custom and word of mouth after about a year of operating. In fact, for busy peak times we have so many enquiries we’re wishing we had more of these -> working on it. December is already fully booked!
Hey Michelle
See topic on Partnership breakup from Geo under Legal and Accounting. Seems George wants to get out of a similar situation.
Glenn
Geo
IMHO and experience with a business partnership over 10 years and 5 partner changes, the best way to end partnerships is to agree to end them on the same terms as they started.
So, cashing out is a good, fair and equitable option. OR one sells to the other, but at arms length. Either get a valuation of the IPs or put them on the market and get an offer from a buyer, then one partner buys for $1 more.
In business partnerships, the honeymoon is soon over, and friendships can turn quite nasty.
Depending on circumstances, legal intervention can be construed as overly antagonistic. Your call……
I’m just here for the posting guys. [whistle]
Hey Derek
Ever got any Nigerian excess government funds faxes? We collect them for fun.
I have a colleague who was taken not once, but three times by a “brokerage firm” from the Pacific rim – “invest in a new listing. Going to go thru the roof.”
Then, call from a firm in the USA – “we represent an investor keen to take on your loss in exchange for Disney shares, but send us US$10,000 to match the share block we have available”
Then, call from a firm in the Netherlands – “we’ve raided the brokerage offices and are working with interpol to recover your funds, send us US$10,000 to cover expenses”
I still can’t believe he fell for it 3 times – even after warnings. On scam 3 I told him to offer them 70% of any cash they recovered.
Life’s going to get tough if you’re greedy!
Hi Michelle
I’m in a commercial property investment with Partners now for about 8 years. The partners have come and gone over the years, with relatively little trauma luckily, HOWEVER, over time priorities change for different folks. For example – one partner may want the rental income, another may want to take cash out.
At present, I’m trying to buy out two partners by refinancing. One wants to sell, the other does not. This cramps my style in terms of the freedom of what I can do with this property. Also, I get to manage the properties and while I enjoy doing it, my partners get the benefit for free (not for much longer though).
One marriage is enough. Partnerships can be marriages made in hell. How to spoil a friendship – do business with them.
I’m sounding awfully negative – sorry – it has not been that bad. The fact that you asked for advice might mean you’re not too sure……
Thanks for the news Derek.
I was actually at the Namibia-Aussie World Cup match in RSA last year. The first-time Namibians were pretty good in the field but collapsed against the bowling attack. But MAN was the Aussie team professional! They did not hold back at all when fielding, even though they knew it was a cruise match. Our chaps told me that they were very friendly after the match though. Stand up guys!
I reckon the higher tax rates in the “western world” is the price you pay for having decent infrastructure and government services (like an effective police force).
Of course, your whole society is also more regulated. In Africa it is better to ask forgiveness than to ask permission.
I really appreciate learning about the economics in Aussie, because if we have to leave here because of a Zimbabwe situation, our first thought is to invade Aussie as most of our friends have done – and by all accounts are loving it. I’d prefer to get to Aussie with cash in hand to make a good start though.
Ta
Glenn
