I’d like to know how the 11 second solution was derived? I’ve read the book, but I don’t think it was touched on, either that or I missed it.
It tells you at what price to buy a property so that the gross rental return is roughly 10%. This will ensure you are in positive territory even after all expenses are taken out.
Take the weekly rent and divide it by 2 then multiply by 1000. This is the MAXIMUM price you should pay to maintain positive cash flow. E.g. property rents for $150 a week, you should pay no more than $75,000 for it.
Because Australia is property mad and a large majority of property investors know this formula these types of properties are as rare as hen’s teeth!
Life is like a box of chocolates – you never know what you’re going to get!
i know what the formular is from the book, but i wanted to know how exactly it provides a gross rental return (ignoring other factors)
e.g. why don’t i divide by 3 instead of 2, or multipy by 2000 instead of 1000.
incidently, why isn’t the formula just the weekly rent multiply by 500. isn’t that simpler ?
Nickey,
I think you are thrashing something rubbery to death and getting nowhere.
Steve’s little ‘sifting tool’ isn’t a formula, it isn’t a rule and it isn’t a solution. If I recall he mentioned all of that in his book, and doesn’t want people to religiously stick to it or grind it down to the gnats ****.
What it is, is a really really rough and ready back of the fag packet – well not even that – 11 second little mental calculation that you can use sitting behind the wheel of your car that approximates a 10.4% gross rental return, which assumes that there is roughly 3 or 3.5% allocated for all outgoings over and above mortgage payments such that there may be something left in the kitty for the residential purchaser.
It’s not rocket science – you’ll go crazy trying to turn the ‘rough and ready’ into rocket science.
If you are still not comfortable, then get your calculator out and do the detailed calcs on any particular property which should only take you 1 minute. Then you can forget about the 11 sec rough and ready guide. If you are too busy to afford 1 min. calculating the fin details on a deal – you’re in the wrong game.
Sorted.
Dazzling,
I’m not nitpicking on the 11 second solution. I wanted to know how it works out an approx. return of 10.4%
I’m new to the world of property, and investing in general. A tool like that (11 sec sol’n) would certainly be helpful in filtering out a huge chunk of properties out there. But I’d like to know how it works out the return, so that I am able to modify it. I.e. filter properties that may provide 8% rental return etc.
It is just simple mathematics – like any formula you can jig the operators around and still get the same result.
To work out gross yield, you multiply the weekly rent * 52 weeks in a year. This gives you the total rent for the year. Now divide that figure (yearly rent) by the purchase price. There’s your yield.
ie $100 week rent on a property that cost $100,000.
So, as an equation, we have
yield = (rent * 52) / price100 (rent) * 52 (weeks) = 5,200
5,200 / 100,000 = 0.052 or 5.2%, gross rental yield.Solving another way, we swap around the known (price) for the unknown (yield), because we know the yield we want (about 10%) but don’t know the price.
so – looking at our formula again :
yield = (rent * 52) / price
we switch it around
yield * price = (rent * 52)
price = (rent * 52) / yieldNow, because we want a yield of 10%, which is 0.10, we can simplify further:
price = (rent * 52) / 0.1To get rid of the division by 0.1, we multiply the RHS of the equation by 10, which gives us:
price = rent * 52 * 10
which is the same as:
price = rent * 520
which is close enough to:
price = rent * 500.
Which is hard to work out in a hurry in your head because we all like to work in 10’s and 100’s.
So we get
price = rent * 1000 / 2
Which is Steve’s formula.
(I think that is right, going back to high school maths there)
But the others who wrote make good points : don’t analyse it to death. You wouldn’t use garden shears to carve a chicken, so don’t think it is some sort of delicate analytical tool – it is a rough way to circle the ‘positive cashflow potentials’ when scanning real estate listings.
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We all need somewhere to live – but do we all need a CBD apartment?I meant to add… I have my own way of mentally checking the yield.
Which is, for every 100,000 of purchase price you need $200 dollars a week in rent. A $300,000 house needs $600 a week to be positive cashflow (now, there’s not to many of those around!).
A $150,000 house needs $300 a week and so on.
Underneath it is almost identical to Steve’s solution but my head works better my way.
The point is you need to understand and adapt tools to suit your needs.
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We all need somewhere to live – but do we all need a CBD apartment?brc,
brilliant! that was exactly what I wanted to know. thanks!
how does this apply in a town(rural city) ?
there would be no way any one here in murray bridge S.A. would pay so much for rent.
we’d be lucky to rent a 140k house for $180 a week
[cowboy2]Mitchy,
I’d guess you’re new to the game. Essentially, in residential real estate there are two possible goals, often mutually exclusive. (Not always).
The first is what most investors do – buy and hope that when they sell, the profits plus the tax breaks they have received will more than cover the losses.
The other way is make sure there are no losses on the way (cashflow positive (or CF+) investing). Steve’s books have advocated the second way and I tend to agree. Then, if you sell at a profit, you know you’ve had two profits along the way.
Back to your question though. Rural towns and cities are not know for spectacular growth and if Murray Bridge has just had a spurt that’d be it for now, IMHO. Murray Bridge is nicer than Tailem Bend, but that’s about all it’s got going for it until the river mouth is really permanently open. I’m an ex-croweater, and it’s my opinion only.
In your position, which I’m not, I would be looking for houses which I could add value to eg. buy and do up. What if a $140K house can only get $180 pe week? Not good, but what if by spending 20k you can increase the value to $180k and the rent to $260 per week?
Steve will tell anyone with the ears to listen that you have buy a problem and sell a solution – I suggest that you buy the books he sells (I know the proceeds from at least one of the two goes to charity anyway) and get inspired.
Regards, and best of luck.
You answered your own question Mitchy,
You can apply the rule, it just does not come anywhere near meeting the conditions of the rule. Thus most investers are no longer investing in Murray Bridge SA if they want positive cashflow property.
What you have to consider is – can a property which does not meet the 11 second rule, become positive cashflow. How long do you expect it to take ? or will improvements make it positive.
Example.
I purchased a unit for $87,500 2 years ago its now rented at $175pw, guess what ? that meets the 11 second rule. And it only took 2 years.Now some would not be happy with that but I am, because I bought it in a place that I thought was going make capital gains also, and it has. It’s now worth $135-140k + it’s going to start paying for itself. Now considering that I borrowed every cent to buy the place, to me that is a pretty good return on investment.When I bought it the rent was $105pw, no where near positively geared, but on doing some homework I found out the rent had not been increase in 4 years and was 25-40% under the market value. Over the 2 years rents have gone up further.
By the way 1 year later I refinanced the property and bought the place next door also. It’s not positively geared yet, but time till tell + it’s had 25% growth in 1 year.
The moral is: don’t stick to the rule for the sake of sticking to the rule, find out what can or will make the deal good with in a reasonable time frame and at an acceptable short term expense to yourself. Remember property is or should be medium to long term.
Mal
Getting out of your comfort zone, can help you become comfortable
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