Hey everyone, I'm new to this community. I recently just finished reading Real Estate Investing in Canada 2.0, which is how i found out about this forum. In the book I came across the formula of (monthly rent x 12) / (value of home) x 100% = to get the % yearly returns on an investment. My question is, do you use the value after all expenses? or do you use the value before your monthly/yearly deductions. For example, your investment rent per month is $700, in a year it would be $8400, so my question is do you use this value or do you use the value after you subtract all the yearly expenses to determine if a property falls in the 8% - 10% value?
Cash Flow Formula
- Thread starter Rooks
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8% GROSS rent divided over price is a guideline. A quick way to weed a property out or continue.
From gross rent you deduct all expenses, such as property taxes, management fees, condo fees (if any), utilities (if paid by you, not tenant), property insurance, repair & maintenance and vacancies, to arrive at a NET operating income. If you divided this NOI over the price you arrive at a CAP rate or yield.
This is frequently below 5% for single family houses, often sub 4%.
From that net yield you pay your mortgage. With tight management and a good purchase you may have some cash-flow at the end of the year.
Real estate has three profit centers. It is a like a three course meal.
The appetizer is the cash-flow.
The main course is the mortgage paydown.
The dessert is the equity appreciation.
More on this here http://myreinspace.com/threads/what-is-better-cash-flow-or-higher-roi.26596/
From gross rent you deduct all expenses, such as property taxes, management fees, condo fees (if any), utilities (if paid by you, not tenant), property insurance, repair & maintenance and vacancies, to arrive at a NET operating income. If you divided this NOI over the price you arrive at a CAP rate or yield.
This is frequently below 5% for single family houses, often sub 4%.
From that net yield you pay your mortgage. With tight management and a good purchase you may have some cash-flow at the end of the year.
Real estate has three profit centers. It is a like a three course meal.
The appetizer is the cash-flow.
The main course is the mortgage paydown.
The dessert is the equity appreciation.
More on this here http://myreinspace.com/threads/what-is-better-cash-flow-or-higher-roi.26596/
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You have to look at all three profit center variables. The cash flow yield is usually the smallest but it is important to have it so you can hold to pay your mortgage down and capture some value upside , in time as it may be 5 or ten years out depending on location and asset type and inflation and improvements to the asset.
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Rooks,
To answer your calculations, its gross rent before deductions i.e. $1250 Rent per month x 12 = $15,000. Now, you divide that by the purchase price of your "Townhome" lets say. $15,000 (divide) $155,000 = 0.0967 (9.67%).
This calculation is just used to weed out properties with a quick calculation. Anything under 8% can be tossed away. Once a potential property fits in the 8%-10% range, now its time for further investigation as Thomas was saying. This is where you calculate your mortgage, property taxes, condo fees (if applicable), property manager, insurance, 5% maintenance and 5% vacancy and subtract that number from your market rent. If the property cash flows to your liking, is in your specialized area/neighborhood and fits your criteria, buy it! Hope this helped!
To answer your calculations, its gross rent before deductions i.e. $1250 Rent per month x 12 = $15,000. Now, you divide that by the purchase price of your "Townhome" lets say. $15,000 (divide) $155,000 = 0.0967 (9.67%).
This calculation is just used to weed out properties with a quick calculation. Anything under 8% can be tossed away. Once a potential property fits in the 8%-10% range, now its time for further investigation as Thomas was saying. This is where you calculate your mortgage, property taxes, condo fees (if applicable), property manager, insurance, 5% maintenance and 5% vacancy and subtract that number from your market rent. If the property cash flows to your liking, is in your specialized area/neighborhood and fits your criteria, buy it! Hope this helped!
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[quote user=MatPiche]as Thomas was saying. This is where you calculate your mortgage, property taxes, condo fees (if applicable), property manager, insurance, 5% maintenance and 5% vacancy and subtract that number from your market rent. If the property cash flows to your liking,
Actually, you first do NOT include the mortgage, as this has nothing to do with the asset yield. You determine the asset yield first.
Then you decide how much money to put down. 10% + VTB ? 20% ? 25% 30 % ? 35% ? 25 year amortization ? 30 years ? Many options ...
But, more than this yield matters. It is like buying a car based on mileage alone.
Other issues matter: state of repairs/upgrades, price per sq ft, area development, schools nearby, parks nearby, road systems, transportation improvements, age of major components (say a new roof due in 3-5 years), yard size, price relative to neighboring properties, interest rate trends, supply/demand situation, potential for (legal or illegal) basement suite, ability to rent garage separately etc. ...
Actually, you first do NOT include the mortgage, as this has nothing to do with the asset yield. You determine the asset yield first.
Then you decide how much money to put down. 10% + VTB ? 20% ? 25% 30 % ? 35% ? 25 year amortization ? 30 years ? Many options ...
But, more than this yield matters. It is like buying a car based on mileage alone.
Other issues matter: state of repairs/upgrades, price per sq ft, area development, schools nearby, parks nearby, road systems, transportation improvements, age of major components (say a new roof due in 3-5 years), yard size, price relative to neighboring properties, interest rate trends, supply/demand situation, potential for (legal or illegal) basement suite, ability to rent garage separately etc. ...