How do you caculate YOUR Rate Of Return

[jayjay]

Hi

How do you lot caculate your ROR???

Is it simlpy rent (52 weeks) / purchase price X 100 to get the %,
or do you factor in rates, insurance etc??

I see several posts stating that they look for ROR at XX%, and wondering if the ROR% is comparable .

Cheers

[orion]

How do you lot calculate your ROR (rate of return)???

Hi Jayjay - do you mean return on investment, the yield, or how quickly you get your initial money back?
I think you are talking about yield, but using incorrect terms.
If it is yield, there are many different ways that people use which is fine as long as they use the same way each time. I just use annual rent / purchase price.

Regards
Graeme Fowler

[MiniMogul]

Gross yield - rent x 52 weeks = divided by purchase price x 100.

Example, house for 52 k, rents for 100 per week
100 x 52 weeks = 5200
5200 divided by 52000 = 0.10 (ten) but to be pedantic, times by 100 = 10

Another quick way....say rent is 140 p/w, purchase price of half that in k
(70) is gonna be 10.4 percent gross yield.

This is a very rough way of finding out if the property is going to break even if you assume:
1) no maintenance or repairs! 2) 80 percent lend 3) no vacancy!
4) rates, insurance, management fees, principal repayments all have to come out of the percentage less your interest rate. 5) interest rate aroung 6.5 percent (the 20 year average, apparently)

So that's a lot of assumptions eh.

And it doesn't take into account capital gains which is speculative.
I have seen software where you punch in your 'capital growth rate' and project it, but to me that is bogus, unless your property is a median price one and then it might be valid. But only a might mind you....

Cash on cash return = the return on the amount you have in the deal.
Some people count lawyers, building inspectors, deposit, insurance, etc etc as 'money you have in the deal' and others just count the deposit. I.e. creative accounting mate, you can make the numbers do anything you want.

then there's tax write-offs such as depreciation. So does that improve your 'return'? I dunno!!! That's debatable. Again, you can make the numbers mean stuff.

Do you count the 6 weeks when your house was being renovated as 'vacancy' or not? I dunno. again....figures schmigures.

Oh, and then there's the 'return on investment'.
hah!
Then some people adjust for inflation, subtract the 'opportunity cost' if they'd just boofed the cash in a term deposit, and, er, add the number you first thought of. Confused?

Yeah, well I prefer 11 percent yields or better with (probable/likely capital gains to boot, that's my criteria.

[fudosan]

When I have access to my PC, I do a full cashflow analysis. When I am in a hurry and can only use my mind, I mentally estimate the gross yield: rent x 50 week/property price. If the figure is greater than the current interest rate + 2%, then it's a potential bargin worth exploring.

[pixie]

You are right - there are different ways published and claimed in the print so it is important to do your own figures and be able to compare apples with apples. Some are gross return, some are net returns and some are merely lies and deception!

It is therefore important to completely ignore ROR, ROI and all the other jargon and simply deal with facts.

the facts are: it costs money to buy, money to run (rates, maintenance etc) and you get money from rent. Therefore make sure your budget is workable, realistic and you can live with it.

For budgeting I use 50 weeks per annum for rental income.

When purchasing - in order to see if the deal looks worth a second look then I use 52 weeks in the calculations.

[Hero]

The ROR measure you use is determined by what you are trying to measure.

I.e are you trying to measure cashflow ( your journey) or are you trying to measure the effect on your net weatlh ( your destination)

The calculation of yields ( indicators of cashflow) should be based on the current market value of the property not what the original cost was.
This is the most common and misleading calculation error made with this measure.

The definitive caclulation of Rate of Return ( indicator of effect on wealth) is obtained from using an internal or modified internal rate of return. This is a complex calculation and requires computing power to calculate. This is how corporations evaluate an investment opportunity to decide if they will invest or not.

I incorporate both the above and other calculations when assessing a potential investment property.

The much quoted "Yield" is a blunt instrument, subject to varying definitions and should only form part of your arsenal of analytical tools. Expecting a "silver bullet" answer is a big ask for just one statistical measure so focusing on one measure is not the way to go.

Relating to a comment about Analysis models requiring your estimate of captial growth. This is an essential element of any good property anlaysis model. Do you really buy a property in the belief there will be no capital growth ? The ability of an analyis to incorporate an allowance for capital growth is essential.

Many people think that a model that forces you to include capital growth is dangerous because it may send out a dangerous signal if the growthe doesnt occur. - Balony!
The purpose of factoring capital growth into your analysis model is to do a pessimistic , realistic, and optimistic scenario. Factoring low or zero captital growth in your pessimistic scenario gives you a worst case basis. This means that your analysis should provide a range of outcomes. If you can withstand the financial effect of the worst case then you should consider it otherwise dont touch it.

Captial growth in anayslis models let you see the answer questions like
"What if I only get 1% growth on average for the next 10 years ?"
What does it mean for my cashflow and net wealth ? Can I sustain these reprucussions if this worst case scenario occurs ?

Dont ignore capital growth , both High and Low in your analysis

Regs
Mark

As previously alluded to there are many measures of what you get out

[orion]

The calculation of yields ( indicators of cashflow) should be based on the current market value of the property not what the original cost was. This is the most common and misleading calculation error made with this measure.

Hi Hero, this is totally incorrect and the way I have heard other investors work out calculations for themselves. They assume the yield goes down on their original purchase price if the property price increases which of course is ridiculous - it only changes as the rent changes. It is on the original purchase price - what you are trying to say is that if you were to buy the same property today for what it is worth, the yield would be lower if rents haven't kept pace with the price.

Relating to a comment about Analysis models requiring your estimate of captial growth. This is an essential element of any good property anlaysis model. Do you really buy a property in the belief there will be no capital growth ?

Is there a full moon at the moment, lots of people coming out with all sorts of strange ideas about various things at the moment.
I don't believe either way, I don't care if prices goes up or not. Sounds like you are probably another one of the investors (specualtors) who use interest only, and make assumptions that prices will always go up.

"What if I only get 1% growth on average for the next 10 years ?"

Well done I'd say - what if you got negative 1% p.a. growth for the next 10 years? I'd definitely prefer the latter.

Regards
Graeme Fowler

[Josko]

Well done I'd say - what if you got negative 1% p.a. growth for the next 10 years? I'd definitely prefer the latter.

Now that is scary, has it ever happened for that long?

Thankfully no risk of a down turn like that for at least another three years, my best guestimate is five and a half. Only speculating though.

[orion]

Now that is scary, has it ever happened for that long?

Don't know about NZ - if not, doesn't mean it can't or won't. Has definitely happened in other countries, lots more than that in some cases.

Thankfully no risk of a down turn like that for at least another three years, my best guestimate is five and a half. Only speculating though.

Why guess, or even try to guess? How does it help you invest, - and does it do you any good whether you are right or wrong?

Regards
Graeme Fowler

[Josko]

Why guess, or even try to guess? How does it help you invest, - and does it do you any good whether you are right or wrong?

With appreciation to your time.

The answer should be, dont try to guess, it wont help you to invest, with the right investment it shouldnt mater whether you would be right or wrong.

However, I am exasperated, after much searching, and only really getting the +ve investment motivation from this forum, (thank you).

I am diving into my first IP and its -ve, after research i believe that it is undervalued, and rental low by 5%. So for this purchase it would be beneficial if there was no downturn for a wee while longer. I intend to re-evaluate the IP in six months throw another 10-15k at it and look for that +ve property with the added equity, yes a little speculative, but with my guestimate accurate I should be in two IP within eight months.

[orion]

The answer should be, dont try to guess, it wont help you to invest, with the right investment it shouldnt mater whether you would be right or wrong.

Well said ivi - your rules need to work as close to 100% of the time as possible.

Regards
Graeme

[Thomo]

How do you calculate your ROR

New Investor. Single bedroom / fully furnished one bedroom apartment (with very small court yard), city centre, Christchurch, nice location, renting at $285 pw, purchase price $200K. Is this a lemon?

[Josko]

Re: How do you calculate your ROR

New Investor. Single bedroom / fully furnished one bedroom apartment (with very small court yard), city centre, Christchurch, nice location, renting at $285 pw, purchase price $200K. Is this a lemon?

Offer 180k, its a darling!

[Josko]

- your rules need to work as close to 100% of the time as possible.

And thus is added my new new rule.

[fudosan]

Don't know about NZ - if not, doesn't mean it can't or won't. Has definitely happened in other countries, lots more than that in some cases.

Japan, in the 90s after the bubble. Prices dropped by as much as 40% of peak in mid 80s.