hi everyone,
this is my first post ,i have been reading the forums for a while to get more information coz i plan to start property investment in the near future , these forums have given me valuable insight to property investment and iam glad to gain knowledge. having said that i would like to improve my knowledge with numbers coz often i come across terms like" property returning 6-7% returns" i would like to request if someone can explain me how these numbers workout and how to calculate them ? a couple of examples if possible?
any replies are greatly appreciated
thank you very muchHi 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
Remember when you are comparing returns you should consider net returns excluding the cost of finance and tax so that you can compare other asset classes eg shares.
hi Lance
that was very helpful,
thank you very much.
harryhi Lance
just one more question
for a investment property to be considered good what should be the minimum ROI percentage.
i worked out an example for a property costing 95000. with a cash deposit of 20000. rental return of 4640 per year.
the COCR came to be 23 % and ROi came to be 4.88%( i havent calculated other costs for this example )
but is 4.48 % a good ROI?
thank you for your patiencecoolharry67 wrote:hi Lance
just one more question
for a investment property to be considered good what should be the minimum ROI percentage?
thank you for your patienceHi 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,
Just correcting myself here:
I should have also mentioned that your ROI should be calculated using your net annual cashflow – not your annual rental income. If you use your annual rental income compared to the total investment cost you are actually calculating the Yield or your Gross Rent Return percentage, which is commonly used when a real estate agent tells you a property has a 6 – 7% return (as mentioned in your original question).
So please bare with me while I update my examples:
1. Yield = (Annual Rent / Total Investment Cost) x 100
2. ROI = (*Annual Cashflow / Total Investment Cost) x 100
3. CoCR = (*Annual Cashflow / Down Payment) x 100*Annual Cashflow is your Annual Rent minus Expenses such as mortgage repayments, repairs, management fees etc.
Using the example you gave me here:
coolharry67 wrote:For a property costing $95000. with a cash deposit of $20000. rental return of $4640 per year.– I'll also add one more figure, your expenses. Let's say that your loan repayments etc. are about $6,444 annually.
1. Yield: ($4,640 / $95,000) x 100 = 4.9%
2. ROI: ($-1,804 / $95,000) x 100 = -1.9% (Negative result)
3. CoCR: ($-1,804 / $20,000) x 100 = -5.4% (Negative result)So by using these numbers we can see that this would be a negatively geared investment. Is negative gearing your strategy, or will you implement a plan to increase the rent to create a positive cashflow investment? Do you plan to renovate and resell making a quick capital gain? There are multiple ways to change the performance of an investment.
I hope I haven't confused you here. The only difference is I've taken your expenses into account.
Cheers,
Lance
hi Lance
i now understand more clearly .The information you gave me is priceless . i feel more confident now and will start to think in the right direction ie positive gearing. i know i have a long way to go but i think it is time i started something..
thank you very much for your time and patience.
Harry
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