[freelanceMember@freelanceJoin Date: 2008Post Count: 93]

December 3, 2008 - 12:53 am

newy777 wrote:

Cheers,
what is an option?? is there any example you could give me..

Hi Newy777,

You can purchase on option on a property which gives you the irrevocable right to purchase that property within a given time frame.

Say for example you purchase a 18 month option… you now have 18 months to exercise your right to purchase the property – during these 18 months the property is not to be sold to anyone but yourself.

If however, you decide not to purchase the property you simply let your option expire (after the 18 months in this example).

An option is similar to a down payment in the sense that it secures your right to obtain the property, but if you choose not to purchase there is no hard feelings, you simply lose the money you spent on the option.

Hope that helps,

Lance

[freelanceMember@freelanceJoin Date: 2008Post Count: 93]

November 24, 2008 - 12:19 am

Hi Duckster,

In regards to the pro's and con's in solution two…

What's the difference between a positive cash flow property and a maximum geared property?

Cheers

[freelanceMember@freelanceJoin Date: 2008Post Count: 93]

November 24, 2008 - 12:09 am

Thanks for your help WJ Hooker

[freelanceMember@freelanceJoin Date: 2008Post Count: 93]

November 11, 2008 - 1:13 am

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

[freelanceMember@freelanceJoin Date: 2008Post Count: 93]

November 10, 2008 - 11:10 pm

coolharry67 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 patience

Hi 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

[freelanceMember@freelanceJoin Date: 2008Post Count: 93]

November 10, 2008 - 5:34 am

bombine wrote:

I have just read how to achieve wealth for life through property investing by Tony Melvin and Ed Chan – are you prepared to comment  on their road to wealth?

Aren't these the same authors who wrote a book about using your super money to buy property?

I believe Steve said himself, that using your own super to borrow money is one of the most riskiest investment decisions you can make.

[freelanceMember@freelanceJoin Date: 2008Post Count: 93]

November 10, 2008 - 1:21 am

Hi 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