Sunday, 9 February 2014

Property Investments

Understanding the figures behind property investments.

Here are the important calculations

Income Statement
Gross Rental Income
Vacancy Allowance (%)
Gross Operating Income = Gross Rental Income - Vacancy Allowance

Annual Operating Expenses 
Total Expenses include assessment tax, quit/annual rent, management service charge, fire insurance, householder's insurance, MRTA, and others.

MRTA = mortgage-reducing term assurance
MLTA = mortgage-level term assurance (MLTA)

Net Operating Income 
Net Operating Income = Gross Operating Income - Total Expenses

Cash Flow (before tax) from your property investment
Having calculated the net operating income, subtract the annual mortgage payments to obtain the cash flow (before tax) from the property investment.

Cash flow (before tax) = Net Operating Income - Annual Mortgage Payments

How much do you value or pay for the property?
Purchase price
Down payment / Equity
Balance financed by mortgage

Mortgage Summary
Term (Years)
Interest (% )
Total Monthly Payment
Total Yearly Payment
Total Debt Payment

Reference:  Mortgage Calculators

Initial Yield Computation
Initial Yield = Gross Annual Rental / Purchase Price 

Those more enterprising aim for initial yield of : 
House  4 to 6%
Condo  8 to 12%

Return on Equity (ROE)
Your returns come from these 3 sources:
1.  Cash Flow (before tax) provided by the property
2.  Gains from your equity growth in the property
3.  Appreciation of your property price over the period.

Your TOTAL RETURNS at the end of the mortgage period = 1 + 2 + 3
TOTAL ROE = (1+2+3) /  Initial Down-payment  for the Property

My general rules:

1.  Properties prices appreciate by 100% every 10 years, higher for those in good locations..
2.  Rental yields are around 3%/year based on present market price.
3.  Rentals increase generally by 10% every 3 years, but only for selected properties in good locations.

When you own a good or great property in a great location at a good price, you will enjoy great ROE on your property investment, using the generous leverage provided by your bank mortgage (using other people's money).  You paid an initial down-payment, and your tenants pay for the mortgages and the expenses.  On top of this, you may even enjoy a positive cash flow from the property giving you regular income.  During the tenure, you continue to enjoy increasing rental, after-all, you have no problem getting the best tenants and the existing tenants will likely pay up since they are making good earnings from the use of the property.  At the end of the mortgage period, you would have owned 100% equity of the property, the property would have appreciated over the long period, and you have also pocketed incomes from the positive cash flow generated by the property.  Totaling all these gains and then working back to your initial down-payment (your equity), you would have realised a great ROE.  

Those less knowledgeable in share investing may wish to go the property route.

1.  Location, location, location = good or great properties
2.  Net Operating Income = Gross Operating Income - Total Expenses
3.  Cash flow (before tax) =  Net Operating Income - Mortgage Payments
4.  Mortgage - go for the largest available mortgage, with the longest term and the lowest interest
5.  Ensure that 2 & 3 are always positive.

(Types of properties:  squatter homes, low cost houses and apartments, houses, apartments and condominiums, townhouses/duplexes, commercial, service apartments, luxury homes, mobile homes, raw land, recreational, ranches, agriculture, industrial, specialty buildings such as stadiums and theaters.)(


Tyler Jackson said...

positive cash flow from the property giving you regular income. During the tenure,

invest in stocks

Elizabeth harville said...

you may even enjoy a positive cash flow from the property giving you regular income.
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