Investment Properties
Important Questions You Should Ask Yourself
HOW DO I KNOW IF AN INVESTMENT IS GOOD, MARGINAL
OR RISKY?
In order to rank your real Estate Investment it is important to understand a
CAP Rate Calculation. Simply stated this calculation is used to determine
the price you should pay in order to achieve what the rate of return will be
on the money you invest.
HOW MUCH DOES IT COST TO HOLD THESE PROPERTIES?
Costs for holding property vary based on the tenant lease you use and
how it is structured. The basic costs to consider are as follows.
OR RISKY?
In order to rank your real Estate Investment it is important to understand a
CAP Rate Calculation. Simply stated this calculation is used to determine
the price you should pay in order to achieve what the rate of return will be
on the money you invest.
HOW MUCH DOES IT COST TO HOLD THESE PROPERTIES?
Costs for holding property vary based on the tenant lease you use and
how it is structured. The basic costs to consider are as follows.
- Annual Real Estate Taxes
- Annual Property and Liability Insurance
- Repairs to structure
- Repairs to appliances
- Lawn Care
- Utilities - Electric, Water, Sewer and Gas
- Garbage Pick up
- Allowance for continuing maintenance (paint, roof, etc)
- Allowance for vacancy
- Management fee (if you don't manage yourself)
- Commission to obtain lease ( if you don't find tenant)
HOW DO I CALCULATE THE RETURN?
We use a three factor calculation this requires two factors which in turn
will generate the third factor. The three factors are Income, Rate of Return
and Value. We use the acronym "IRV" to indicate this calculation. This is
done by using a triangle with I (income) on top, R (rate of return) on the
lower left and V (value) on the lower right.
Income divided by Rate = Value (fraction) = V
Income divided by Value (fraction) = R
Rate X Value = Income R x V = I
To keep this example simple lets assume you have $100,000.00 in cash to
spend on a single family home. You find a house that will need $15,000.00
in upgrades. That means you will have $85,000.00 to spend on the home.
You need to establish a monthly market rent that can be charged to a
tenant. You have purchased a 3 bedroom, 1.5 bath home with a one car
garage. You paint the home completely on the interior and exterior,
install new floor coverings and install a refrigerator, stove and dishwasher.
Experience shows you can charge a monthly rent of $950.00. This
multiplied by 12 gives you your annual gross income of $11,400.00. You
now need to determine your Net income.
We use a three factor calculation this requires two factors which in turn
will generate the third factor. The three factors are Income, Rate of Return
and Value. We use the acronym "IRV" to indicate this calculation. This is
done by using a triangle with I (income) on top, R (rate of return) on the
lower left and V (value) on the lower right.
Income divided by Rate = Value (fraction) = V
Income divided by Value (fraction) = R
Rate X Value = Income R x V = I
To keep this example simple lets assume you have $100,000.00 in cash to
spend on a single family home. You find a house that will need $15,000.00
in upgrades. That means you will have $85,000.00 to spend on the home.
You need to establish a monthly market rent that can be charged to a
tenant. You have purchased a 3 bedroom, 1.5 bath home with a one car
garage. You paint the home completely on the interior and exterior,
install new floor coverings and install a refrigerator, stove and dishwasher.
Experience shows you can charge a monthly rent of $950.00. This
multiplied by 12 gives you your annual gross income of $11,400.00. You
now need to determine your Net income.
ANNUAL INCOME $11,400.00
Less Annual Real Estate Taxes $1,400.00
Less Annual Insurance $400.00
Less Allowance for Maintenance (5%) $570.00
Less Allowance for Vacancy (5%) 570.00
All other costs paid by tenant
NET INCOME $8,460.00
We know our value is $100,000.00 (our cost).
Net income 8,460.00 = 8.5% Rate of return (R.O.I.)
Less Annual Real Estate Taxes $1,400.00
Less Annual Insurance $400.00
Less Allowance for Maintenance (5%) $570.00
Less Allowance for Vacancy (5%) 570.00
All other costs paid by tenant
NET INCOME $8,460.00
We know our value is $100,000.00 (our cost).
Net income 8,460.00 = 8.5% Rate of return (R.O.I.)
| MID FLORIDA REAL ESTATE BROKERAGE Office 352-589-0444 / Fax 352-589-8381 Toll free 1-877-405-0444 email us here |
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